Improved Sourcing Flexibility through Strategic Procurement586587/... · 2013-01-11 · 3 Master of...
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Improved Sourcing Flexibility through Strategic Procurement A Case Study in a Global Manufacturing Company ARIAN BORHANAZAD MARTIN TRAN Master of Science Thesis Stockholm, Sweden 2012
Transcript of Improved Sourcing Flexibility through Strategic Procurement586587/... · 2013-01-11 · 3 Master of...
Improved Sourcing Flexibility through Strategic
Procurement
A Case Study in a Global Manufacturing Company
ARIAN BORHANAZAD
MARTIN TRAN
Master of Science Thesis
Stockholm, Sweden 2012
2
Improved Sourcing Flexibility through
Strategic Procurement
A Case Study in a Global Manufacturing Company
By
Arian Borhanazad
Martin Tran
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3
Master of Science Thesis INDEK 2012:149
KTH Industrial Engineering and Management
Industrial Management
SE-100 44 STOCKHOLM
Master of Science Thesis INDEK 2012:149
Improved Sourcing Flexibility through Strategic
Procurement
A Case Study in a Global Manufacturing Company
Arian Borhanazad
Martin Tran
Approved
2012-October-09
Examiner
Mats Engwall
Supervisor
Mandar Dabhilkar
Commissioner
Bombardier Transportation
Contact person
Helena Rydbeck
Abstract
Background – Increase in global competition, technological changes and demanding
customers have resulted in more knowledge-intensive, unstable, complicated and an uncertain
environment. In order to overcome these demand uncertainties and tough circumstances,
manufacturers are required to investigate methods to increase flexibility. To achieve the
flexibility improvements, each component of supply chain such as suppliers, manufacturing
plants, warehouses, and distributors must possess the potential to be flexible. Theory implies
that the main link between company’s upstream supply chain namely suppliers and its own
business unit are the sourcing strategy. Usually sourcing practitioners distinguish between
sourcing strategies using portfolio models. They normally categorize purchased items based
on the strategic importance of the item and characteristics of its supply market. It is a critical
issue to explore how different sourcing strategies, for different categories of procured items,
can influence sourcing flexibility.
Purpose– The purpose has been diagnosed as to study how the prerequisites of Bombardier’s
procurement procedures along with its associated strategies, can affect the flexibility that can
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be provided through sourcing namely sourcing flexibility. This study desires to investigate the
concept of sourcing flexibility with considerations on category level. It can be beneficial to
investigate how different strategies, related to different categories of procured component, can
influence the level of sourcing flexibility specified to that category. This would lead us to
two key questions: How can sourcing flexibility be defined in Bombardier and why is it
required? How can sourcing strategies influence sourcing flexibility considering different
categories of components?
Methodology– To provide appropriate definitions for sourcing flexibility and strategic
procurement, this study went through a comprehensive review on the relevant literatures. By a
deep analysis, accompanied with several unstructured interviews on one of the undergoing
projects in the company, the drivers for the sourcing flexibility have been diagnosed. The
procured components have been categorized into four categories of strategic, bottleneck,
leverage, and noncritical through 4 different structured quantitative questionnaires. 33 diverse
individuals with purchasing and/or engineering background answered those questionnaires.
The categorization criteria have been extracted out from two models suggested by Kraljic
(1983) and Olsen & Ellram (1997). Four independent components, one from each category,
were selected for further observations. Finally, the links between sourcing strategies and
sourcing flexibilities were expansively analyzed through 9 semi structured interviews with
company’s strategic purchasers and suppliers’ representatives.
Conclusion– Sourcing flexibility can be defined from two perspectives. First one refers to the
capability of the focal firm to change the structure of its upstream supply chain. Second
aspect refers to the ability of company’s suppliers to provide it with flexibility in three
dimensions of delivery, volume and product. Both two aspects along with related dimensions
can be measured in three different conditions of required, actual and potential by using range,
mobility and uniformity as measuring elements. The results showed that the first perspective
has a direct relationship to the sourcing strategies that focal firm may apply for different
categories of procured component. Furthermore, the availability of second perspective is
highly dependent on the relationship between the focal company and its suppliers, where
strategic procurement plays an indispensable role. Based on the results the required level of
sourcing flexibility, related to each category, differs significantly with other categories. The
findings also suggested that the levels of delivery, volume and product flexibility have a close
connection to the diverse strategies and attributes of the four different categories. Additionally
they are well dependent on the internal operational capabilities of the suppliers along with the
established relationship between buyer and supplier.
Originality/Value– Main portions of previous studies have explored the concepts of sourcing
flexibility and strategic procurement separately. Although, there exists some narrow numbers
that have analyzed the relationship between sourcing strategies and sourcing flexibility to
some limited extent. This study tries to contribute to the existing literature by empirically
exploring the principal reasons for companies necessitating to increase sourcing flexibility. It
investigates how sourcing flexibility can be improved through strategic procurement. The
main contribution is to consider sourcing flexibility from the category perspective. Latter is a
subject that has been neglected in the previous literatures. It is extremely hard to find
literature which has analyzed sourcing flexibility at the category level. This report analyses
the level of sourcing flexibility specified to different categories of strategic, bottleneck,
leverage, and noncritical components. It suggests some factors that may influence the
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selection of a specific sourcing flexibility strategy regarding different component categories.
Finally, it may introduce some extra elements that can be influential on the level of sourcing
flexibility dimensions. Some examples of those influential elements are bargaining power and
establishment of a close relationship.
Key-words
Sourcing flexibility, Strategic procurement, Sourcing strategies, Purchasing portfolio models
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Acknowledgment
This research has been done with the support and cooperation of several
individuals to whom we are truly grateful.
We would like to deeply thank Helena Rydbeck for all her kind helps and
valuable advises. She always understands and encourages us throughout this
project. We also would like to thank Dr. Mandar Dabhilkar for useful suggestions
and supervisions on this work.
We should make many thanks to all strategic and operative purchasers in
Bombardier Västerås for all their kind cooperation and helps during the data
collection process. We also would like to specially thank Tommy Andersson,
Sören Nordland, and Peter Albert, who were so kind to put time and help us
grasp an overview over some respectful suppliers of Bombardier. We should
thank all individuals in different departments of Bombardier Västerås such as
project management, operations, and procurement who eagerly helped us to
carry out this project.
We would finally like to thank our family for all support and belief they always
give us.
Stockholm, September, 2012
Arian Borhanazad
Martin Tran
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List of Figures Figure 1- Conceptual Model Adapted from Kraljic (1983), Gonzalez-Benito (2007) and
Fantazy, et al (2009) ...................................................................................................................................... 17
Figure 2-Guide to the thesis ....................................................................................................................... 19
Figure 3-Research phases ........................................................................................................................... 23
Figure 4- Designing a questionnaire (Collis & Hussey, 2009) ...................................................... 27
Figure 5-First survey response rate ....................................................................................................... 28
Figure 6-second and third surveys response rates .......................................................................... 29
Figure 7-Fourth survey response rate ................................................................................................... 29
Figure 8-Procedure of data analysis ....................................................................................................... 31
Figure 9- Organization of the work ......................................................................................................... 32
Figure 10-Typical supply chain ................................................................................................................ 38
Figure 11- Dimensions of supply chain flexibility (Lummus et al., 2003) .............................. 38
Figure 12-applied model for dimensions of supply chain flexibility......................................... 40
Figure 13-Nature of sourcing flexibility drivers (Tachizawa & Thomsen, 2007) ................ 42
Figure 14-Drivers of sourcing flexibility (Pujawan, 2004 ) .......................................................... 44
Figure 15- Schematic exhibition of sourcing flexibility dimensions ......................................... 46
Figure 16-Hierarchical exhibition of sourcing flexibility dimensions (Sanchez & Perez,
2005).................................................................................................................................................................... 46
Figure 17- Step 1 of Kumar et al’s (2006) framework for implementation of flexibility ....... 49
Figure 18- Virolainen (1998) framework for purchasing strategy formulation .................. 50
Figure 19-Step 1 of Kumar et al’s (2006) framework for implementation of flexibility
integrated with Virolainen (1998) and Krause et al., (2001) framework ................................... 50
Figure 20- Step 3 of Kumar et al’s (2006) framework for implementation of flexibility ....... 53
Figure 21- Strategic sourcing processes (Favre & Brooks, 2002) ................................................ 54
Figure 22- Foundation of categorization tool inspired from Kraljic (1983) and Olsen and
Ellram (1997) ................................................................................................................................................... 58
Figure 23-Organizational structure of projects ................................................................................. 62
Figure 24-Supply chain structure of the studied project ............................................................... 65
Figure 25-Schematic exhibition of process of changing volume and delivery date ............ 67
Figure 26-Result of first survey, aimed at finding the weights of factors ............................... 69
Figure 27- Relative score of distinguished factors ........................................................................... 70
Figure 28-Results of categorization ........................................................................................................ 71
Figure 29-Position of selected components ........................................................................................ 73
Figure 30-Change in volume ...................................................................................................................... 75
Figure 31-Changes in products’ delivery dates .................................................................................. 76
Figure 32-Nature of changes in delivery dates .................................................................................. 77
Figure 33-Operation deliveries statue ................................................................................................... 78
Figure 34-By-pass deliveries statue ....................................................................................................... 79
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List of Tables Table 1- Determining elements for defining flexible supply chain (Stevenson & Spring,
2007).................................................................................................................................................................... 37
Table 2-Summary of literate on dimensions of supply chain flexibility .................................. 39
Table 3-Dimensions of sourcing flexibility inspired from Kumar et al., (2006) and
Lummus et al. (2005) .................................................................................................................................... 47
Table 4-Elements and indicators of flexibility dimensions (Upton, 1994; Koste &
Malhotra, 1999; Duclos et al., 2003) ....................................................................................................... 47
Table 5-Factors influence the strategic importance of procured items ................................... 59
Table 6- Factors influence the complexity of supply market ....................................................... 59
Table 7-Summary of procedures for changing the structure of supply chain ....................... 68
Table 8-Charactaristics of selected components ............................................................................... 73
Table 9-Definition of sourcing flexibility elements .......................................................................... 80
Table 10-summary of sourcing flexibility drivers............................................................................. 83
Table 11-Required level of sourcing flexibility at category level ............................................... 84
Table 12-Sources of sourcing flexibility ................................................................................................ 88
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Table of Contents
Abstract ................................................................................................................................................ 3
List of Figures ..................................................................................................................................... 7
List of Tables ...................................................................................................................................... 8
Section 1 Introduction ............................................................................................................... 12
1.1 Background ............................................................................................................................................ 12
1.2 Problem formulation ......................................................................................................................... 14
1.3 Research questions ............................................................................................................................. 15
1.4 Purpose .................................................................................................................................................... 15
1.5 Hypothetical research model ......................................................................................................... 16
1.5.1 Model illustration .............................................................................................................. 16
1.6 Delimitations ......................................................................................................................................... 18
1.7 Contributions ........................................................................................................................................ 18
1.8 Disposition .............................................................................................................................................. 19
Section 2 Methodology ............................................................................................................... 21
2.1 Classification of research ................................................................................................................. 21
2.2 Research Paradigm ............................................................................................................................ 22
2.3 Implemented methodology ............................................................................................................. 23
2.3.1 Data collection .................................................................................................................... 25
2.3.2 Data Analysis ....................................................................................................................... 31
2.4 Applied method for categorization of components ............................................................. 31
2.5 Organization of the work ................................................................................................................ 32
2.5.1 Planning step ....................................................................................................................... 32
2.5.2 Data collection step ........................................................................................................... 33
2.5.3 Analysis step ........................................................................................................................ 34
2.5.4 Conclusion step ................................................................................................................... 34
2.6 Method Criticism ................................................................................................................................. 34
2.6.1 Validity ................................................................................................................................... 34
2.6.2 Reliability .............................................................................................................................. 35
Section 3 Theoretical Framework ......................................................................................... 36
3.1 Supply Chain Flexibility .................................................................................................................... 36
3.1.1 Definition .............................................................................................................................. 36
3.1.2 Dimensions of Supply Chain Flexibility .................................................................... 37
3.1.3 Sourcing Flexibility ........................................................................................................... 40
3.1.4 Measurements and requirements ............................................................................... 47
3.1.5 Implementation .................................................................................................................. 48
3.2 Strategic procurement...................................................................................................................... 53
3.2.1 Define strategy .................................................................................................................... 55
3.2.2 Pre-qualify suppliers ........................................................................................................ 55
3.2.3 Establish contracts ............................................................................................................ 56
3.2.4 Manage supplier relationships ..................................................................................... 56
3.3 Purchasing Portfolio Models .......................................................................................................... 56
3.3.1 Categorization ..................................................................................................................... 57
3.4 Relationship between strategic sourcing and sourcing flexibility ............................... 59
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Section 4 Empirical Study ......................................................................................................... 61
4.1 Company background ....................................................................................................................... 61
4.1.1 Bombardier Transportation .......................................................................................... 61
4.1.2 Propulsion and controls .................................................................................................. 62
4.2 Organizational structure ................................................................................................................. 62
4.3 Procurement strategy ....................................................................................................................... 63
4.4 Analyzed project .................................................................................................................................. 64
4.4.1 Deliverables ......................................................................................................................... 64
4.5 Supply chain structure ...................................................................................................................... 65
4.6 Selected items ....................................................................................................................................... 65
4.6.1 Item 1-Speed Sensors....................................................................................................... 65
4.6.2 Item 2-Low Inductive Busbar ....................................................................................... 66
4.6.3 Item 3-Connectors ............................................................................................................. 66
4.6.4 Item 4-Power Semiconductors (IGBT) ..................................................................... 66
4.7 Changing volume and delivery schedule .................................................................................. 66
4.8 Changing product specification.................................................................................................... 68
4.9 Changing structure of supply chain ............................................................................................ 68
Section 5 Results .......................................................................................................................... 69
5.1 Procurement strategic direction .................................................................................................. 69
5.2 Procured items categorization ..................................................................................................... 70
5.2.1 Strategic components ...................................................................................................... 71
5.2.2 Leverage items .................................................................................................................... 71
5.2.3 Bottleneck items ................................................................................................................ 72
5.2.4 Noncritical items ................................................................................................................ 72
5.2.5 Placement of selected samples ..................................................................................... 72
Section 6 Analysis ........................................................................................................................ 74
6.1 Business unit strategy and flexibility ......................................................................................... 74
6.2 The necessity of flexibility ............................................................................................................... 74
6.2.1 Volume uncertainty .......................................................................................................... 74
6.2.2 Delivery dates uncertainty ............................................................................................. 75
6.2.3 Mix uncertainty................................................................................................................... 76
6.2.4 Nature of changes .............................................................................................................. 76
6.3 Current flexibility level ..................................................................................................................... 77
6.4 Definition of sourcing flexibility ................................................................................................... 79
6.4.1 Influential factors and measurements ...................................................................... 79
6.5 Distinguished drivers for sourcing flexibility ......................................................................... 80
6.5.1 Drivers .................................................................................................................................... 80
6.5.2 Required level of sourcing flexibility at different categories .......................... 83
Section 7 Discussion ................................................................................................................... 86
7.1 Sourcing strategies and sourcing flexibility ........................................................................... 86
7.1.1 Sources ................................................................................................................................... 86
Section 8 Conclusions ................................................................................................................. 91
8.1 Fulfillment of research questions ................................................................................................ 91
8.2 Managerial implications .................................................................................................................. 92
8.3 Future research .................................................................................................................................... 93
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Section 9 Bibliography ............................................................................................................... 94
Section 10 Appendices ............................................................................................................. 99
Appendix 1 ............................................................................................................................................................. 99
Appendix 2 .......................................................................................................................................................... 100
Appendix 3 .......................................................................................................................................................... 102
Appendix 4 .......................................................................................................................................................... 104
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Section 1 Introduction This section provides the reader with a general background regarding the area of
research and discusses the problem that is sought to be addressed. Based on the
problem formulation, two research questions are formulated, after which the purpose
of this report is presented. Preliminary definitions of supply chain flexibility, sourcing
flexibility, strategic procurement, and connection between sourcing flexibility and
strategic procurement have been gathered up in order to help the reader get
acquainted with the key research areas of study. A hypothetical research model has
been developed and elaborated in this section. That model is the basis research plan
that this study would apply. The section ends with the delimitations and the intended
contribution of this study complemented by how the report is going to be carried out.
1.1 Background
Increase in global competition, technological changes, and demanding customers
have resulted in more knowledge-intensive, unstable, complicated, and an
uncertain environment. In order to overcome the tough circumstances,
manufacturers are required to investigate methods to increase flexibility (Zhang
et al., 2002). Flexibility is being considered as one of the major indications for
competitiveness in today’s intensive competitive marketplace (Pujawan, 2004 ).
As Suarez et al (1995) pointed out high competition in the market can cause
uncertainty which in consequence makes customers request higher level of
adaptation to their up and down requirements. This situation makes it difficult
for the firm’s supply chain to initially predict customers’ requests and further
adjusts its business process according to those customers’ requests (Suarez &
Cusumano, 1995). Several literatures highlighted the importance of flexibility as
a factor contributing to competitive advantage of firms. Because it enables firms
to make rapid and cost-effective responses according to changes occurring in
specific customer requests (Gunasekaran, 1999).
Major bodies of literatures have underlined flexibility from manufacturing
aspect. This is while the potentially more fundamental concept of supply chain
flexibility has been neglected (Pujawan, 2004 ). Achieving the level of flexibility,
that suits customers’ requirements (i.e. quick delivery of a variety of high-quality
and low-cost products), necessitates organizations to consider wider aspects
rather than solely manufacturing flexibility (Zhang et al., 2002). Manufacturing
flexibility has a multi- dimensional nature. It specifies the requirement of
different types and levels of flexibility in supply chain organizations. These types
and levels can be adapted according to strategic objectives of related
organizations. Consequently, manufacturing flexibility is not generic. For
achieving customer value-added level of flexibility, companies must look beyond
merely manufacturing flexibility (Kumar et al., 2006). A key point concerning the
supply chain flexibility is that the whole process must be viewed as one
incorporated system. The level of flexibility and performance associated with
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each component of supply chain such as suppliers, manufacturing plants,
warehouses, customers, and etc. is undeniably influencing the overall flexibility
level and the performance of the entire supply chain (Duclos et al., 2003). The
component of manufacturing flexibility plays an indispensable role in providing
supply chain flexibility. However, as the supply chain ranges beyond the
enterprise borders, the same approach is true regarding supply chain flexibility
too. It must also extend beyond one firm's internal flexibility (Stevenson &
Spring, 2007). Supply chain flexibility implies the importance of relationship
between different nodes in supply chain whereas the performance of each stage
is dependent on up and down stages in value stream (Fantazy et al., 2009).
Sourcing flexibility is a crucial dimension of supply chain flexibility (Vickery et
al., 1999; Duclos et al., 2003; Sanchez & Perez, 2005; Lummus et al., 2005; Kumar
et al., 2006). According to Kumar et al. (2006) it can be defined as ”the ability of
the supply chain partners to control the supply levels (increasing or decreasing)
economically and with no additional time to meet customer demand”. The role of
supplier is highly significant in this type of flexibility (Pujawan, 2004 ). The
importance of establishing an alliance between business organizations and their
up and downstream partners has been widely realized among companies. Firms
have taken several courageous steps in order to eliminate inter- and intra-firm
barriers for forming alliances. These actions are being considered as attempts to
decrease associated uncertainty and also enhance control over supply and
distribution channels (Gunasekaran et al., 2004). The concept of forming efficient
and effective alliances with suppliers is being referred to as strategic
procurement management (Kumar et al., 2006).
The main link between company’s upstream supply chain namely suppliers and
its own business unit is the sourcing strategy (Kim et al., 1995). Supply base is
one of largest resources associated with a company’s capabilities (Narasimhan &
Das, 1999). The strategic importance of the purchasing function in overall
corporate performance necessitates firms to pay close attention to purchasing
functions. This will bring up attempt aiming to improve the supplier networks
management (Kim et al., 1995). Supply strategies are required to be linked with
appropriate types of relationships with suppliers in order to produce desired
business outcomes (Cousins & Lawson, 2007). Portfolio models have been
extensively used in strategic decision-making purposes. Their aims have been to
support resource allotment decisions among strategic business units (Olsen &
Ellram, 1997). Two broadly used purchasing portfolio models have been
distinguished as the models presented by Kraljic (1983) and also Olsen and
Ellram (1997). The primary aim of purchasing portfolio models is the
development of a portfolio model that can enable the firm to manage supplier
relationships. (Olsen & Ellram, 1997).
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As mentioned earlier flexibility can be a source of competitive advantage for
firms. So in order to achieve that advantage; purchasing unit, as a strategic
component contributing to firm performance, must develop proper strategies
and action programs aimed at achieving flexibility objectives (Narasimhan & Das,
1999). This report investigates the possibility of achieving the higher level of
sourcing flexibility through applying appropriate sourcing strategies relevant to
each category of procured items. Initially proper purchasing portfolio model
should be applied. The model is being used to categorize procured items in
accordance to their strategic importance and the characteristics of their supply
markets. The assumption is when firms apply appropriate sourcing strategies it
can result in higher level of sourcing flexibility. This can be achieved by making
precise considerations on relevant factors and dimensions. Primary purpose of
this study has been formed on the basis of these requirements. Purpose has been
diagnosed as to study how the prerequisites of the company’s procurement
procedures along with its associated strategies, can influence the flexibility that
can be provided through sourcing namely sourcing flexibility. This approach has
been extensively explained in following parts of the report.
Even the scholars who have explicitly measured supply chain flexibility (e.g.
Vickery et al., 1999; Pujawan, 2004 ; Lummus et al., 2003) have not concentrated
in detail on recognizing the drivers and sources of volume flexibility. Therefore,
this study has selected to do a more extensive study on the drivers and sources
of sourcing flexibility more than what have been done to date. The main output
of this report can be to identify and measure fundamental drivers and sources of
sourcing flexibility. That can result in improvements in performance and/or
distinctive competitive advantages. This study can bring further insights
together into the drivers and sources of sourcing flexibility from the strategic
sourcing point of view.
1.2 Problem formulation
Bombardier Transportation, Västerås Propulsion and Control (VAPPC), is a
project-based company. VAPPC’s is procuring its main internal customer,
Bombardier vehicle builder, by approx. 80 % of its business. The remaining 20 %
goes to external vehicle builders. Currently they are facing pressure from top
management in order to be more responsive towards customer demands. New
directive says that VAPPC will always need to adapt to requested changes from
the customers without any substantial incurred extra costs. Based on this
requirement, they are pursuing approaches to provide them with higher level of
flexibility. It is necessarily to include supply chain flexibility as a core of the
analysis in order to be able to meet the demand for higher level of flexibility. As
mentioned earlier, an essential aspect of supply chain flexibility has been
distinguished as sourcing flexibility, which is highly dependent towards
suppliers. In general premise, sourcing flexibility rests on mainly supplier
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capabilities and also the structure of relationship between buyer and supplier.
Considering the mentioned aspects, it is particularly influential how Bombardier
has formed its relationships with its suppliers in a way that highlights the
strategic requirement of flexibility. In addition, it is not cost-efficient to apply
same sourcing strategy towards every supplier and for all kinds of procured
items. So the primary challenge here for Bombardier is to primarily distinguish
the categories of procured items. Then, their sourcing strategies should be
adapted with considerations over business unit strategy. Currently providing
flexibility towards customer’s requests is being sought as one of the strategic
objectives from Bombardier’s top managements’ point of views. The question is
that whether the existent sourcing strategies support that strategic direction.
Thus, the next step is to examine whether its current forms of relationships with
suppliers encourage Bombardier’s strong demand for flexibility or not. If not,
reasonable procedures should take place in order to modify the relationship
based on strategic requirements.
1.3 Research questions
To approach the problem mentioned above the following research questions
have been defined:
Research question 1: What is the definition of sourcing flexibility?
Research question 2: How is sourcing flexibility connected to strategic
procurement?
- How can different types of sourcing strategies for different
types of procured items (strategic, bottleneck, leverage and
noncritical) influence sourcing flexibility related to that
category?
- How do the drivers of sourcing flexibility differ between
different categories of procured item (strategic, bottleneck,
leverage and noncritical)?
- How do the sources of sourcing flexibility differ between
different categories of procured item (strategic, bottleneck,
leverage and noncritical)?
- Do the current purchasing practices with the suppliers
highlight the flexibility needs? What kinds of purchasing
practices can be applied in order to achieve a higher level of
sourcing flexibility through suppliers?
1.4 Purpose
The purpose of the report is to examine and distinguish between relevant
theories and practical tools in order to help Bombardier Transportation to
achieve a higher level of sourcing flexibility. The strategic alignment of the
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procurement function with Bombardier corporate strategy will be analyzed
empirically. The findings will be examined to be applicable to the company. In
addition, their contribution towards purpose will be investigated in deeper
extent. Covering previously mentioned research questions will lead to fulfillment
of the purpose.
1.5 Hypothetical research model
This paper is trying to address some gaps that have been observed in the
literatures during the in-depth review of materials related to strategic sourcing
and supply chain flexibility. Preliminary concern is around the rationalization of
the definition of the supply chain flexibility or more specifically sourcing
flexibility. Second concern is related to the connection between sourcing
strategies, connected with different kinds of component, and sourcing flexibility.
This connection has rarely been investigated via an empirical research. Second
concern is significantly tied up with exploring the role of flexibility in sourcing
strategy. Latter is of greater importance for this report. This importance is due to
the main purpose of the report which is to investigate the effects of strategic
procurement on potentially achieving the higher level of sourcing flexibility. The
alignment between sourcing strategy and business unit strategy is being referred
to as strategic procurement. Based on the above identified gaps the following
hypothetical model has been depicted (figure 1). The empirical research is a
mean to check the relevancy of the proposed model.
1.5.1 Model illustration
Making analysis over the current supply structure of a focal firm will provide
opportunities to investigate the uncertainties associated with the procedure.
This analysis may also explore the actual and potential level of flexibility that the
existent structure can handle. By distinguishing uncertainties, one can figure out
the motivation behind a requirement of the specific kind of flexibility. The focus
of this report is on the sourcing flexibility so by assessing the uncertainties, the
drivers of the sourcing flexibility can be determined. The drivers are potential
factors that necessitate the requirement of sourcing flexibility. Since the
characteristics of the components that are being placed in the different
categories (strategic, bottleneck, leverage and noncritical) are dissimilar, their
flexibility drivers are diverse and divergent. Based on the realized drivers, the
required level of sourcing flexibility can be conceived. This required level is the
magnitude of flexibility that a sourcing procedure needs in order to satisfy the
drivers. The required level of sourcing flexibility violates across the different
categories of components due to the same reason mentioned previously.
Actual level of sourcing flexibility can be realized by investigating the current
structure of supply network. This is the degree of sourcing flexibility which
currently exists. Potential level refers to inherent magnitude of flexibility which
is accessible considering the current structure. The gaps can be distinguished by
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comparing the three elements of required, potential, and the actual level of
flexibility. These gaps can be tried to get mitigated later on by aligning sources of
sourcing flexibility with the required degree of flexibility.
The premise of the model is that the concept of strategic procurement is being
considered as one of main sources of sourcing flexibility. Furthermore, sourcing
efficacy, defined as a fit between procurement strategic objectives and sourcing
capabilities (Gonzalez-Benito, 2007), has a positive effect on sourcing flexibility.
When a company establishes its functional strategies, it is crucial to consider the
uncertainties and characteristics of suppliers. According to Kraljic (1983)
different categories of procured items (strategic, bottleneck, leverage and
noncritical) necessitate the application of different sourcing strategies. These
differences may result in diverse sources for sourcing flexibility engaged with
each category. The required level of sourcing flexibility is dissimilar for each
category of the procured items. Evaluating the required level, while
simultaneously considering the potential accessible sources of sourcing
flexibility, may result in an improved level of sourcing flexibility.
Business unit
strategy
Sourcing strategy
Strategic procurement
Sourcing capabilities
Current structure of supply network
Actual level of sourcing flexibility
Potential level of sourcing flexibility
Required level of sourcing flexibility
Potential improvement of
sourcing flexibility
Uncertainties and suppliers
charactaristics
Co
mp
are
Compare
Compare
Ass
ess
Strategic items
Sources of sourcing flexibility
Leverageitems
Bottleneck items
Non-critical items
sourcing efficacy
Strategic items
Drivers of sourcing flexibility
Leverageitems
Bottleneck items
Non-critical items
Figure 1- Conceptual Model Adapted from Kraljic (1983), Gonzalez-Benito (2007) and Fantazy, et al (2009)
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The above-mentioned model is going to be investigated considering the fact that
flexibility is a relative factor. In another word, the desired level of flexibility is
always meaningful in trade-off with other aspects such as associated cost. Since
the definition of flexibility is highly subjective (Upton, 1994; Vickery et al., 1999).
It has constantly been tried to consider different perspectives, regarding
interrelated trade-offs, in the definition of sourcing flexibility. So in the case of
the investigated company the trade-off between cost and flexibility level form
the strategic direction of Bombardier. This aspect will persistently be considered
through the whole procedure of analysis.
1.6 Delimitations
As it will be discussed later, supply chain flexibility consists of several
dimensions but the only dimension that this report intends to focus is on
sourcing flexibility. This means that other dimensions such as new product
flexibility, manufacturing flexibility and logistics flexibility have been identified
as out of scope. This delimitation does not necessarily indicate that those non-
regarded dimensions are less prominent; it just defines the scope of this study.
As it mentioned earlier supply chain flexibility emphasizes the systematic
overview on supply chain. Also, it points out that the performance of each step in
the chain is influential on the other stages. So the other dimensions carry the
same level of significance as sourcing flexibility. Because of time shortages and
in order to maintain the accuracy of the report, just one area of focus has been
found relevant to the purpose of the study.
It has decided to investigate only one ongoing project at the case company. The
Bombardier’s projects are all large ones and analyzing more than one would
exceed the time limitations of this study. Furthermore, since this study has been
done in just one firm, active in the restricted industry, the generalizability of the
results is limited.
1.7 Contributions
There are two main target groups for this study. The first is individuals, on a
managerial level and/or employees within the procurement department at
Bombardier that have the ambition to improve customer responsiveness
through sourcing flexibility. The second target group is students at The Royal
Institute of Technology (KTH) as well as other universities that have an interest
in supply chain management especially in strategic procurement and sourcing
flexibility. Also, this study can be of interests to people working at other
functional or strategic departments of organizations in order to observe the
linkages between different partners of supply chains.
The aim of study is more specifically to contribute to the following parts:
19
An increased understanding why companies are required to provide
sourcing flexibility
An increased understanding how strategic procurement can influence
sourcing flexibility
An increased understanding how purchasing portfolio models can
contribute to improve sourcing flexibility at the category level
An increased understanding how the company in the study can benefit
from the power-dependence perspective between the buyer and supplier
in order to improve sourcing flexibility
1.8 Disposition
The study consists of 8 main parts, which are outlined as figure 2. These parts do
not necessarily replicate the chronological order of study execution, but it
provides the reader with a sketch of the general practical understanding of the
work.
Section 1-Introduction
Section 2-Methodology
Section 3-Theoretical framework
Section 4-Empirical study
Section 5-Results
Section 6-Analysis
Section 7-Discussion
Section 8-Conclusion
Figure 2-Guide to the thesis
Section one includes the introduction of the thesis; containing background,
problem consideration and formulation, purpose as well as delimitations and the
intended contributions. The second section is regarding the descriptions of the
applied methodology. This chapter designates the scientific framework of used
20
references, the problems that have ascended and the approaches taken when
directing this study. These initial two sections form the foundation for the report
and offer the reader the critical information to evaluate the quality, reliability
and validity of the material. This is of high significance since these materials
outline the basis for the analysis.
The third section comprises the theoretical framework, consisting of theories
related to supply chain and sourcing flexibility, strategic procurement, and
supplier relationship complemented with other theoretical concepts of
relevance. The following section contains the empirical study. This section
provides the reader with required information about the case company. This
information includes a brief description of the company, introduction of
underexamined project, organizational structure, flow of processes, and
depiction of strategic procurement at Bombardier. Result section compliments
the empirical study section. Result section is delineating the executed surveys
and questionnaires and also exhibits the results of categorization of procured
items. It tries to gather empirical evidence for the previously developed
hypothetical model. These three parts deliver a theoretical and empirical
foundation to the reader. This will smooth the comprehension of the subsequent
analytical part of the study.
The last three sections contain the analysis, discussions, and the relevant
conclusions. Here, the theoretical framework and the results are linked together
followed by the outcome of the in-depth interviews. Subsequently, the
conclusions are drawn from the previous facts and information. The conclusion
section covers the general summary of the whole study. It investigates the
explored answers for the research questions and discusses the managerial
implication. The report will be complemented by introducing the possible areas
for future investigations.
21
Section 2 Methodology In this section, the approaches regarding the procedure of selecting methods on how
this study is carried out will be presented. This may make it possible for further
researcher to replicate this study and execute a critical assessment of the performed
study. Also, discussions regarding validity, reliability, and scientific credibility of the
study will take place in this section. The findings reported in this paper are drawn
from a large in-depth study of one totally project-based company active in the
transportation industry, Bombardier Transportation. In this section, the research
paradigm to which this study belongs is presented along with the chosen
methodologies.
2.1 Classification of research
According to Collis & Hussey (2009), researches can be classified according to
their purposes, processes, logics, and outcomes. Depending on purpose of one
research, it can be described as exploratory, descriptive, analytical or predictive
(Collis & Hussey, 2009; Sachdeva, 2009).
When there are remarkably few or somehow no earlier studies on related
research problem that can be used as references, then the conducted research
methodology is exploratory. The aim here is to look for new patterns, ideas and
hypotheses rather than testing or confirming ones. The focus is mainly on
gaining insights and familiarity with the subject for further investigation at later
steps. Descriptive research will be conducted in order to describe phenomena as
they are. It takes deeper approach rather than a exploratory research to depict
the characteristics and specifications of a particular issue. Researcher in
analytical research goes beyond merely describing the characteristics of the
issue. The research here analyses and explains why or how the under
investigation issue is happening. Analytical research aims to understand
phenomena by discovering and measuring casual relations between them.
Finally, predictive research even takes deeper approach than analytical one and
aims to generalize from the analysis. It ties to forecast the probability of
occurring similar situation elsewhere by predicting certain phenomena on the
basis of hypothesized, general relationships (Collis & Hussey, 2009).
Considering the purpose of this study, it will be mainly classified as analytical
research. The initial approach is to develop adapted definition of sourcing
flexibility specifically relevant to company under observation. There exists some
literature on concept sourcing flexibility. So this study gathers the information,
analyses and adapts them according to requirements of the company. Further, it
develops a specific definition for the concept. The consequent steps regard
investigating the relationship between different sourcing strategies and their
influence on sourcing flexibility. There also exist sufficient literatures on
developing efficient sourcing strategies for different kinds of components. The
aim here is to analyze different kinds of sourcing strategies and explore their
impact on level of sourcing flexibility. Then considering the nature of
22
underexamined sourcing strategy, it can be allocated to the appropriate category.
By category, this study means the introduced categories of components by
Kraljic (1983). These categories are namely strategic, bottleneck, leverage, and
noncritical components. This subject has been discussed in detail in section 3.3
of this report.
This study desires to address a specific issue existent in the case company and
makes deep investigations in order to propose some potential guidelines and
solutions relevant to the issue underexamined. Considering this, it can be placed
in applied research category where studies are being characterized to apply their
findings for solving a specific, existing problem (Collis & Hussey, 2009). The
emphasis here is on immediate application of findings in a practical situation.
During the study, it has been tried to base the research both from a theoretical
point of view and, even more, on reality.
2.2 Research Paradigm
The approach, that researcher takes toward science, governs how research is
conducted in each case. Each study should be placed in the spectrum between
positivism and interpretivism in order to clarify foundation for the
chosen methodology.
Positivism assumes that social reality is singular and objective. Based on this
view, what is studied is separated from the student and free from bias values
(Collis & Hussey, 2009). From this assumption, only phenomena that are
observable and measurable can be considered science. The research process in a
positivist study should be as free as possible from personal values. Furthermore,
the studied object exists both before and after it has been studied. An
interpretivistic view of science is based on the fact that the interpretation of
social reality that exists in the minds cannot be ignored. It will always involve
some form of subjectivity and multiple interpretations (Collis & Hussey, 2009).
Studies made from this assumption agree and reveal the personally valued
interpretations that are given by the studied object.
This presented study is in its ontological assumption positivistic when the
truth that is presented is to be impartial and independent of the observer. The
purpose of this study is to shape a more certain magnitude of knowledge in
compare to what has been previously shaped. The research has been done by
articulating research questions, which are answered through different scientific
methods, i.e. the survey investigations, theoretical analysis, and several in-depth
interviews. This scientific view has been selected; if possible, to confirm
the theories and let them face the reality to further be formed.
23
2.3 Implemented methodology
Bryman & Bell (2011) stated that when conducting a research, a connection
should be established between existing theories and practical situation. This
approach has caused researches to get divided to two categories of inductive and
deductive. The inductive approach concentrates more on understanding and
interpreting processes. In inductive approach, empirical findings are being used
as a basis for producing new theories (Collis & Hussey, 2009).
On the other hand, this study pursues the deductive approach. Based on the
existent literatures related to relevant subjects, conceptual and theoretical
structure is going to be developed and then tested and approved by empirical
research. This is also a definition of deductive research (Bryman & Bell, 2011;
Collis & Hussey, 2009). For achieving the purpose, this report has been divided
to three phases. Different methodological approaches have been taken into
consideration for implementing of each phase.
Defining sourcing flexibility
Categorizing procured
components
Exploring relationship between sourcing
strategies and sourcing flexibility
Phase 1
Phase 2
Phase 3
Figure 3-Research phases
The first phase regarded the development of appropriate definition for sourcing
flexibility. The first phase uses qualitative data collection approach. Several
literatures are being reviewed. Relevant theories got adapted according to the
requirements of Bombardier in order to provide the definition for sourcing
flexibility. Study went through an intensive literature review on supply chain
flexibility in order to meet the first phase’s purpose of the report. It investigates
several aspects of supply chain flexibility such as definitions, dimensions,
measurements, requirements, and implementation. Then the study got narrowed
24
down to sourcing flexibility and above mentioned aspects have been also
investigated for sourcing flexibility. In this way, the framework of reference for
the analysis was formed.
The second phase has been shaped around procedure of categorizing the
procured component groups. During the report’ start-up phase, several
questions and criteria were formed within the research area. Many of these
questions and criteria have later on been used in both surveys’ and interviews’
questionnaires. Based on the selected theories three survey forms with three
distinctive questions were developed. These surveys were also aiming at three
different groups of respondents. In order to categorize procured item, they
should be positioned on a two-dimensional plot. This report defined the vertical
axis of the plot as “strategic importance of procured items” and the horizontal
axis as “complexity of supply market”. For analyzing the position of the procured
components on the vertical axis, one survey was sent to 17 managers and
another survey was sent to 13 strategic purchasers. The purpose of the survey
that was sent to managers was to find the importance weight of 5 previously
defined criteria. The aim of the survey sent to strategic purchaser was to
distinguish the actual level of importance of each criterion for each procured
component. For analyzing the position of the procured items on the vertical axis,
a distinctive survey was sent to strategic purchaser. The aim was to distinguish
the actual level of importance of each criterion for each procured component.
Finally, 13 surveys were sent to component engineers in order to check the
validity of previous surveys sent to strategic purchasers. The definitions of
criteria related to each axis along with detailed information about applied theory
for categorizing procured components have been brought together in part 3.3 of
this report.
The third phase aims to establish a connection between relevant theories and
empirical study. It investigates the potential relationship between sourcing
flexibility and sourcing strategies at the category level. In order to check this
relevancy, first 4 procured components were selected, one from each category.
Then 9 interviews were executed in order to analyze the relationship between
sourcing strategy and sourcing flexibility at the category level. 5 interviews were
done with strategic purchasers specific to each of selected component. 4
additional interviews were accomplished with sample supplier of each
component.
It has been tried to generate a largely valid and as objective study as possible. It
was expected to be able to discover support within accessible theories, as well as
the reality of the field company, and consequently be able to examine the issue
and possibly to influence it.
25
The arguments, used later in the study as a basis of the final solution, have been
proposed in the form of the hypothetical model. The model has been tried to get
approved and confirmed by using relevant theories, practical observations, and
interpretation of gathered empirical data. Based on the observations, new
conclusions and interpretations have been drawn. Conclusions have been
confirmed or invalidated through in-depth interviews. It was tried to provide
circumstances where both empirical and theoretical studies have the same
opportunity to influence the practical approach.
Considering the process of research, it can be divided into two categories of
qualitative and quantitative. The determination with qualitative research is to
realize the context of an occurrence or a definite experience. In comparison
quantitative researcher determinedly try to understand how all parts function
together in order to generate a clear picture of the issue under study (Bryman &
Bell, 2011). Researcher exhibits more control over the research subject and the
study is more formalized and structured in the quantitative method.
Furthermore, the analysis of quantitative research is based on statistic method
and consequently has a higher degree of generalizability. The analysis of
qualitative research , on the other hand, is more based on interpretative method
and complex contexts (Collis & Hussey, 2009). The aim is to achieve a deep
understanding of a definite phenomenon in the context. For gaining more precise
results, the researcher must get close to the information source and make the
analysis on the basis of understanding and interpretation (Bryman & Bell, 2011).
In order to answer this study’s research questions effectively, the mixture of
qualitative and quantitative method have been used while more concentrations
were on qualitative ones. This study used the in depth qualitative approach in
order to be able to clarify the dynamics between actors and other relevant
aspects in the studied contexts. The work has its foundation in quantitative as
well as qualitative methods. The findings from the interviews were qualitatively
impacted by attitudes which can be a source of error regarding the results. A
comprehensive picture was attained with the help of interviewing people from
the different functions. Execution of several interview supported the report to
cover many aspects of interest. This fact was constantly remembered that
different functions have different goals. This was highly considered during and
after the interviews. In this way, the potential sources of error when interpreting
the interviews were minimized. Furthermore, it was believed that a mixture of
qualitative and quantitative data was supportive when trying to catch an
objective tool.
2.3.1 Data collection
Primary data are the data that have been collected from an original source by
researcher itself. On the other hand, secondary data are data that have been
collected from a previously existing source (Collis & Hussey, 2009). Both types of
26
data have been gathered and applied in the course of this study. Followings are
the descriptions of the methods that have been used for collecting data to meet
the purpose of this report.
2.3.1.1 Primary data collection
Primary data are being gathered to tackle a particular research objective. Those
kinds of data can be collected using methods such as surveys, questionnaires,
direct observations, experiments and etc. Primary data are reliable ways to
collect data because the researcher knows the exact sources of data and how it
has been gathered and analyzed since it is being collected by the researchers
themselves. Primary sources necessitate the researcher to interact with the
source and extract information form it (Sachdeva, 2009). First, a brief
introduction of the methods employed in this thesis has been provided in the
following.
Surveys
Survey research is one of the most critical areas of measurement in an applied
research. Surveys can be divided into two broad categories of questionnaires and
interviews (Sachdeva, 2009). In questionnaires, sample of respondents are being
asked to answer a list of carefully structured questions (Collis & Hussey, 2009). It
is usually in written format that the respondents complete it. There exists
several number of distribution method for questionnaires such as by post,
telephone, online and face-to-face (Collis & Hussey, 2009; Sachdeva, 2009). It is
based on this fact that the information sought is standardized. Survey
characteristic is that the researcher can measure a certain phenomenon by
asking pre developed and structured questions (Bryman & Bell, 2011). The main
steps involved in designing a questionnaire have been summarized in Figure 4.
27
Design the questions and instructions
Determine order of presentation
Write accompanying letter/request letter
Test questionnaire with a small sample
Choose method for distribution and return
Plan strategy for dealing with non-responses
Conduct test for validity and reliability
Figure 4- Designing a questionnaire (Collis & Hussey, 2009)
Since, in the course of conducting surveys, all respondents answer exactly the
same questions, they are subjects to the same type of motivations and
provocations. This leads to satisfactory conditions for accomplishing a reliable
quantitative processing and analysis of the gathered responses (Bryman & Bell,
2011). To meet the objective of the second phase of this study (i.e to categorize
the component category), four distinctive surveys were developed and
distributed to relevant people for their responses. VAPPC has divided the items
that it purchases to different groups based on the mechanical nature of those
items. These groups referred to as component groups. All surveys were designed
in a way to produce information that is required to place each component group
in its relevant category.
In order to initially find the weight of each factor, found influential on the
strategic importance of component categories, a survey was developed
containing one question. The survey was asked respondents to rank the factors
in order of importance from their point of view. A specific number was assigned
to each position in order that the relative importance of each factor in
comparison to the rest can be calculated (Appendix 1). The second survey was
designed in a way to extract detailed information about the factors required for
placements of the component groups on the vertical axis of the plot (Appendix
2). As mentioned earlier the vertical axis was defined as “strategic importance”.
The third survey was designed in a way to extract the detailed information about
the factors required for placements of the component groups on the horizontal
28
axis of the plot (Appendix 3). As pointed out earlier, the horizontal axis was
defined as “complexity of supply market”. The fourth survey was designed in
order to check the validity of some factors related to both vertical and horizontal
axes (Appendix 4). The method used in formulating the surveys was based on 1
to 5 Likert scales (where 1 was low and 5 was high).
The respondents
As discussed previously, each survey was aimed for different respondents. Following
table shows the related respondents for each survey in addition to the achieved
response rates. The importance of response rate is highlighted for checking the validity
of the report.
Figure 5-First survey response rate
71%
29%
Response rate for first survey
Answered Unanswered
Total number: 17 Target group: Managers
Aim: Find the weight of factors
29
Figure 6-second and third surveys response rates
Figure 7-Fourth survey response rate
Interviews
When working with interviews, there are two basic principles that researchers
should consider: the level of standardization and structuring. Former refers to
the extent that the researcher decides to stick to the predetermined order and
construction of the questions. The level of structuring refers to the level that
respondent has the freedom to interpret questions considering respondent’s
previous experiences and competence (Bryman & Bell, 2011).
77%
23%
Response rate for second and third surveys
Answered Unanswered
77%
23%
Response rate for fourth survey
Answered Unanswered
Total number: 13 Target group: Component engineers
Total number: 13 Target group: Strategic purchasers
Aim: Placement of component on a two-dimensional plot
Aim: Check the validity of responses
30
Semi-structured interview is an analytical form of in-depth interviews. By
conducting that the interviewer tries to investigate a specific group of topics in
order to penetrate particular questions even further (Collis & Hussey, 2009).
After categorizing the component categories into four groups, some areas of
further exploration have been distinguished. Some new questionnaires were
formulated from an initial analysis of the data gathered. These concerned certain
sourcing strategies, flexibility challenges, and key success factors when sourcing
from suppliers. Particular parameters associated with these questionnaires
needed further penetrations and explanations in order to go into detail of the
issue and clarify the stances. To do that and get required further information, 9
semi-structured interviews were executed. Five with strategic purchasers
responsible for sample component, selected from each category, and four with
relevant persons from the supplier side of those components. Four focused
individual interviews were conducted through telephone. Each interview took
more than 2 hours and in total, almost 20 hours were spent on the interviews. To
minimize any potential misunderstandings, the supporting documents
containing the desired questions were sent to the respondents in advance. The
interviews were also recorded so that quotes can be replicated correctly. The
questions that were asked during the interviews have been brought together in
appendix 5 for further references.
2.3.1.2 Secondary data collection
According to definition of secondary data, presented previously, they are usually
less expensive and easier to collect and access in comparison to the means of
collecting primary data. In addition, it is decidedly timesaving. The secondary
data make it feasible to continuously return to the source of origin and assess its
relevance. The secondary data also exhibits some limitations despite the many
benefits that they potentially offer. Since it has been collected for a different
purpose than the existing one, it may be difficult to perfectly fit them with the
current issue under study and/or relate them to the primary data that actually
were gathered. An additional limitation is the risk of subjectivity that jeopardizes
secondary sources. The only way to solve this problem is to use multiple sources
when conducting a research (Aaker et al., 1995).
The theoretical framework of this study has been mainly based on literatures,
periodical articles, information from the internet and Bombardier’s internal
portal. This actually indicates that the secondary data used are chiefly associated
with the theoretic investigation that has been implemented. Journal of
purchasing and supply chain management, journal of operations management,
journal of production economics, and Sloan management review are some
examples of scientific journals been used in the course of this study. The libraries
of Royal School of Technology (KTH), Stockholm University and Stockholm
School of Economics were used to search for applicable literature. Additional
31
information was collected through databases such as Elsevier, Wiley online
Libraries and Emerald.
The existing theories have been collected in different steps through the study. In
the initial step, the aim was to get a general comprehension of strategic sourcing
and supply chain flexibility. Eventually the theoretic study became more specific
and detailed as a greater level of knowledge and understanding was evolved. The
detailed evolution of the each step of work has been extensively explained in
part 2.5.
2.3.2 Data Analysis
This report applies the following structure for the procedure of analyzing the collected
data.
Data collection
Secondary sources
Primary sources
Data reduction
Data display
Conclusions drawing/verifying
Figure 8-Procedure of data analysis
The data are being collected both from theory and at the site. Then it will be
filtered down according to the actual requirements. Then the filtered data are
being categorized into sections which would refer to the relevant theories that
are going to be used. The analysis is being steered grounded on the collected
data and then those data can be presented and visualized as results. Eventually
from the analysis of the collected data, conclusions and recommendations can be
made.
2.4 Applied method for categorization of components
This study applies a weighted factor score method for categorizing the component groups. This method consists of a number of factors for each dimension. This method allows for a fully customized approach. Researchers can
32
decide on factors, weights, and sometimes even scores. Total scores per dimension can be calculated in the both ways of an additive model or the average model. For calculation of the factors’ scores related to the vertical axis, this study uses the average model while for the scores related to the horizontal axis, the study applies additive model.
In the case of Bombardier, there exist several key factors that should have been considered in the procedure of categorization. In addition, there was a high requirement for customization and flexibility related to the methods that was supposed to be used for categorization. These two were the chief reasons for application of weighted factor score method.
2.5 Organization of the work
Figure 9 depicts the actual organization of this report. Detailed explanation of each step
has been brought into attention afterwards.
Planning Step Data Collection Step Analysis Step Conclusion Step
IntroductionIdentifying purpose
Getting familiar with the company and processes
Formulating research questions
Identifying appropriate theories
Collecting required theories
Collecting data from company
InterviewsQuestionnaires
Investigating methodologies
Adapting theories according to practical
requirements
Getting conclusion based on analyzed data
Analyzing gathered dataCheck the validity and
reliability of the hypothetical model
Examine the relevancy of applied theories
Compare findings according to theories
Figure 9- Organization of the work
2.5.1 Planning step
The concentration of the planning step was first of all to gain a general
understanding and overview over the problem that this thesis was formed to
address. To be able to do that, it was essential to take grasp over Bombardier’s
activities and procedures specifically the ones related to the relationship
between purchasing department, customers and suppliers. Therefore, a sample
project was selected for further analysis. The selection of sample project was
based on the extent of volatility of customer requirements. It has been tried to
select the project that was extremely unstable in order to achieve satisfactory
overview over the need of required flexibility and its importance. Several
interviews with different people, involved in the project, were taken place to
understand the processes. The interviewees were holding different positions
such as project manager, production planner, operative buyer and etc.
33
Furthermore, information also was gathered from Bombardier’s internal
network and also some observatory trips to manufacturing site were made. With
improved knowledge over the company and information gathered about
problem under study, the purpose of the study clearly discussed with supervisor
inside the company and got finalized.
Parallel with collecting data for the general overview, a pile of potential useful
theoretical literatures were gathered. The search for relevant theories was
mainly concentrated on supply chain flexibility, sourcing flexibility, purchasing
theories somewhat related to purchasing portfolio approaches and the linkage of
purchasing strategies to corporate strategies. The literatures reviewed were
mostly scientific journal articles and books, but also some other sources such as
conference proceedings were being considered. The detailed summary of
theories, which have been found applicable, has been brought up together in the
theoretical framework section of this report.
The theoretical framework made it possible to brighten the purpose of the thesis
and define the problem more clearly. By revising the research questions in a
more precise manner, the problem could be delimited into a manageable size.
Accordingly, the distinctive steps towards finding a solution were formed more
precisely.
2.5.2 Data collection step
Throughout this step data was collected. In order to select and bring in the
information needed, specified for Bombardier, the data collection step consisted
of several different tools such as surveys and interviews. It was essential to make
sure that no significant point had been left out from the lists of possible factors.
At the same time, it was vital that the factors be relevant for Bombardier. Further
the respondents’ opinions regarding prioritization of factors, from importance
point of view, were collected. The aim was to ensure the coverage all
perspectives of interest and, therefore, interviews took place with individuals
working as strategic purchasers and also representatives of suppliers. The
interviews were mainly structured, but the intention was also to provide a
situation that the respondent can think independently. Thus, the interviews
carried out in a semi-structured but still flexible form. The respondents were
contacted in advance, and the appointments were fixed at their convenient time.
The investigations regarding the relevancy of applied methodologies along with
assuring the validity of selected theories took place at this step. In this step, a
huge amount of data was collected from a different department inside the
company. The portion of collected data which found irrelevant were reduced in
order to increase the accuracy of the work.
34
2.5.3 Analysis step
The analysis was based on the information gained in the data collection step in
addition to studied theories. The goal of the work was to investigate the potential
relationship between sourcing strategies and sourcing flexibility at the category
level. To be able to grasp the nature of this relationship and get background
information about that a synthesis of the different studied theories was done.
The facts that the studied items were sample components and that there was an
awareness regarding the purchasing portfolio models at Bombardier, were also
taken into account at this step.
The factors derived from the theories, surveys and interviews in the previous
step are needed to be further studied continuously. A compilation was done after
the surveys, and interviews to ensure that mutual understandings of what was
stated were realized. The results of the categorization phase were also evaluated
with Director of Supply Chain at Bombardier. The different answers were
discussed from the wide perspectives and an analysis over the roots was made.
The analysis led to a broad understanding regarding the relationship between
sourcing strategies and sourcing flexibility at the category level. Finally, the step
was reached where the results in the form of conclusions and recommendations
could be presented.
2.5.4 Conclusion step
In this step, the results from both the sourcing flexibility defining phase and the
categorization of component phase were summarized and reflected on. The
categorization procedure and the sourcing strategies development were brought
together and observed upon as a combined structure for improving sourcing
flexibility. Finally, some thoughts about the degree of generalization and
possibilities of the further investigations were also shared.
2.6 Method Criticism
2.6.1 Validity
Validity is the extent to which the research findings accurately reflect the
phenomena under study (Collis & Hussey, 2009). The data collected through all
the interviews was validated through respondent validation (Bryman & Bell,
2011), hence the participants were asked for corroboration. The questions
were emailed to the interviewees in order to make them prepared beforehand
and get the information validated. In general, all the structured questions were
designed in the way to be sincere and clear for respondents and an introduction
of the interviewer and the topic of the study were to start with (Bryman & Bell,
2007). Furthermore, the validity of gained data was enhanced and checked
using convergent validity test. Thus, level of consistency found between
interviewees’ actual choice of product and acquired data. Throughout the
report, it was tries to facilitate the development of the quantitative methods by
35
the qualitative research (Bryman & Bell, 2007). The quality of the data gathered
from the questionnaire also got checked through performing different
validation measures. Further, an important aspect in order to get decent
external validity is to have high response rate. A considerable amount of time
has, therefore, been put on the cover letter and design of the questionnaire in
order to enhance the ease of responding.
2.6.2 Reliability
Reliability refers to the absence of differences in the results if the research were
repeated (Collis & Hussey, 2009). Reliability of this study is supported by using
reliable sources of information, namely a large number of academic journals
specific to the area under study, supply chain management. The reliability of the
interviews is maintained by having the interviews with both suppliers and
strategic purchasers. This helps to cross-check information and excludes bias
from both sides’ replies as people are often biased towards the way they do their
business.
The capabilities of the researcher are highly influential on the reliability while
conducting interviews or observations. Both the interviewer and the interviewee
are prone to make subjective judgments when registering the answers. When
conducting surveys, the ability to ensure reliability in advance is restricted. It
cannot be decided that the whether the survey is reliable or not before receiving
actual results. However, this study tried to minimize the risk of misinterpretation
and also to improve reliability by preparing comprehensive instructions,
accurate design of the questions, and a pilot survey of respondents who were not
directly engaged. Furthermore, the report used structured observations and
standardized interviews to enhance and control reliability.
To conclude the reliability in the analysis is hard because this work was
influenced by the researchers’ interpretations. The aim is that to secure the
reliability, as much as possible, through support in theory and continuous
feedback from people involved.
36
Section 3 Theoretical Framework In this section, the theories that have been used in order to construct the theoretical
arguments of this paper will be presented. It consists of three main sub-sections with
the flexibility focus and its related materials as the first one, analysis of strategic
procurement as the second that will be complemented by the comprehensive review on
purchasing portfolio models. In the last section, the connection between these two
aspects will be the main focus of investigation. Later in the report, the analysis will be
formed based on the integration of these theories.
3.1 Supply Chain Flexibility
3.1.1 Definition
Although different definitions for flexibility have been proposed by several
authors, no cohesive concept has been widely accepted, and there still exists
many unanswered questions about flexibility (Upton, 1999). It is generally
noticed as an adaptive reaction to environmental uncertainty (Gerwin, 1993).
Upton (1994) defined flexibility as ‘‘the ability to change or react with little
penalty in time, effort, cost or performance’’. Therefore, flexibility is being
observed as a proactive trait designed into a system, rather than a reactive one
which may actually result in deficiencies in time, efforts, cost and performance
(Gosling et al., 2010). Flexibility is being considered as a relative attribute, in
contrast to an absolute one. It means that it can be evaluated in comparison with
other attributes. Also, flexibility can be referred to as potential or actual.
Whereby it is easier to measure actual one (Koste & Malhotra, 1999). It may also
be considered as having two distinguishing elements. Internal factors to the
business that describe system behaviors. External elements related to customers
or suppliers which conclude the actual or perceived performance of the company
(Oke, 2005).
Zhang et al (2002) defined flexibility as the organization’s capability to
encounter a growing variety of customer requirements while concurrently
keeping costs, delays, organizational disruptions and performance losses at or
near zero. In another view over the definition of flexibility, Prater et al., (2001)
defined it as the degree of firm’s capability to adjust the time that goods can be
received from suppliers or be shipped to customers. The expansive definitions of
flexibility can be generalized in accordance to the concept of supply chain (Zhang
et al., 2002).
Vickery et al. (1999) presented a broad definition for supply chain flexibility. It
has been defined as a concept incorporating those flexibility dimensions that
directly influence firms’ customers and are the shared responsibility of two or
more functions along the supply chain. These aspects cover both internal
(marketing, manufacturing) and external (suppliers, channel members) side of
the value chain (Vickery et al., 1999).
37
Kumar et al. (2006) have defined supply chain flexibility as “the ability of supply
chain partners to restructure their operations, align their strategies, and share
the responsibility to respond rapidly to customers’ demand at each link of the
chain, to produce a variety of products in the quantities, costs, and qualities that
customers expect, while still maintaining high performance.”
Stevenson & Spring (2007) presented five elements that are required in order to
provide a thorough definition for the flexible supply chain. These elements along
with their descriptions have been brought up together in Table 1.
Elements Description
Robust network or rigid
flexibility
The range of events that the existing supply chain structure is able to
cope with
Re-configuration flexibility
The ease(mobility) with which the supply chain can be re-configured
(adaptability). The need to re-configure is largely determined by the
range (or resilience) of the existing supply chain structure.
Active flexibilityThe ability to act as a chain either as a response to, or in anticipation of,
changes/events (i.e. a reactive or proactive capability)
Dormant or potential flexibilityThe flexibility of the supply chain is partially a contingent resource, i.e. it
does not have to be a demonstrable capability
Network alignment
Entities are focused on aligning their capabilities in order to meet the
objectives of the supply chain and compete as a chain, i.e. internal
goals are subordinated to those of the supply chain
Table 1- Determining elements for defining flexible supply chain (Stevenson & Spring, 2007)
These elements are going to be applied as the basis for defining sourcing
flexibility further in the report.
3.1.2 Dimensions of Supply Chain Flexibility
For a global organization desiring world-class performance having a pleased and
satisfied customer is of exceptionally high importance (Gunasekaran et al.,
2004).That point of view, necessitates all activities within a supply chain to be
aimed or concentrated towards fulfilling consumers’ requisities. Accordingly
supply chain flexibility taxonomy ought to be considered from the viewpoint of
the whole chain value-adding system (Kumar et al., 2006).
Advocators of this perspective suggest examining supply chain flexibility from
an integrative, customer-oriented point of view (Vickery et al., 1999).
Consequently required supply chain flexibility taxonomy incorporates those
dimensions of flexibility that have a direct impact on the firm’s customers
(Kumar et al., 2006). A comprehensive definition for the domain of supply chain
flexibility should include all those flexibility dimensions that integrate all supply
chain participants to successfully meet customer demands (Duclos et al., 2003).
38
Each author may present dissimilar dimensions of supply chain flexibility.
However, the flexibility dimensions must include all the activities inside supply
chain and be relevant to supply chain functions. This covers a wide range from
procuring raw material to delivering a product through to the hand of customer.
The usual steps here includes procuring the raw materials and parts (sourcing),
developing new products, manufacturing/production, inventory, order
management, distribution methods engaged in delivering of the finished product,
and information systems linking all these together (Duclos et al., 2003; Pujawan,
2004 ). The schematic view of typical supply chain has been presented in Figure
10.
Figure 10-Typical supply chain
Duclos et al. (2003) developed a conceptual model of supply chain flexibility
consisted of six components. This model has been refined by Lummus et al.
(2003) to five components. These are: operational systems, logistics processes,
supply network, organisational design and information systems flexibility
(Lummus et al., 2003).Figure 11 exhibits the graphic presentation of these
components.
Logistics Flexibility
Operations Flexibility
Organizational Flexibility
Intra-Node Information system Flexibility
SuppliersSuppliers CustomersCustomers
Inter-Node Information system Flexibility Inter-Node Information system Flexibility
Supply Flexibility Supply Flexibility
Logistics Flexibility
Figure 11- Dimensions of supply chain flexibility (Lummus et al., 2003)
Considering other aspects, some alternative recent studies have distinguished
four determinants of supply chain flexibility: supply(sourcing),
manufacturing(production), distribution(delivery) and product development
Supplier’s suppliers
Direct Suppliers ManufacturerDirect
customersFinal customers
DownstreamUpstream
39
(Swafford et al., 2006; Pujawan, 2004 ).This view over dmensions of supply chain
flexibility is consistent with the dimensions that Kumar et al., (2006) presented
in their article. They suggested five dimensions of sourcing, developing new
products, product customization, responsiveness, and delivering the finished
products. Their proposal over this taxonomy has been based upon integrative,
customer-oriented perspective (Kumar et al., 2006). The Table 2 summarize the
studies that have proposed several conceptual models to elaborate the
dimensions of supply chain flexibility.
As it can be observed from the table, it is difficult to detect a totally consistent
view over the dimensions of supply chain flexibility in diverse literatures. The
view that this study takes along the supply chain flexibility is to consider it as
cross-functional and cross-business nodes of firms engaged with each other to
deliver cost efficient and high performing product or service to the final
customer. Furthermore, this consideration should be in a way that covers all the
activities that take place over the supply chain, whether between internal
department within an organization or between external partners.
Duclos et al. (2003)
Dimensions of supply chain
flexibility
Lumnus et al.
(2003)
Pujawan (2004)
Sanchez & Perez (2005)
Swafford et al.
(2006)
Vickery et al. (1999)
Kumar et al. (2006)
Ø New product development/Launch
Ø Product/Customization
Ø Supply/Sourcing/Procurement
Ø Production/Operation system/Manufacturing
Ø Logistics/Delivery/Distribution/Access
Ø Responsiveness/Market
Ø VolumeØ Trans-shipmentØ OrganizationØ Information
× × × × × × ×
× × × × × ×
× × × ×
× × × × × × ×
× × × × × ×
× × × × ×
Table 2-Summary of literate on dimensions of supply chain flexibility
As a result of taking integrated and customer-oriented perspective, seven
dimensions distinguished relevant for supply chain flexibility. These dimensions
are: Operations system, Organizational, Information systems,
40
Logistics(distribution), Sourcing, Responsiveness and New product
development. All of these dimensions are linked together, and flexibility
performance at each node is directly dependent on the performance level of
other partners. The schematic view, that this study uses for the conceptual model
of supply chain flexibility, has been depicted in Figure 12.
Operations Flexibility
Organizational Flexibility
Intra-Node Information system Flexibility
SuppliersSuppliers CustomersCustomers
Inter-Node Information system Flexibility Inter-Node Information system Flexibility
Logistics(Delivery) Flexibility
New product development flexibility
Responsiveness Flexibility
Sourcing Flexibility
Figure 12-applied model for dimensions of supply chain flexibility
Although all above mentioned aspects are entirely joined together and their
effectiveness will be realised by operating as a linked chain, the focus of this
study is mainly on sourcing flexibility. The benefits of sourcing flexibility can be
highlighted in terms of deferred order administering, responding to changes in
demand dissemination across the supply chain nodes, promptly reacting to
potential errors in forecasting, boosted efficiency in order filling, tracking and
managing supplies (Christopher et al., 2006).
3.1.3 Sourcing Flexibility
If consider the supply chain from the perspective of meeting customer orders, it
will be resulted that no single part is able to reduce customer lead-time
significantly by operating alone (Zhang et al., 2002). The only attempts that can
increase flexibility and reduce uncertainties are cross-functional and cross-
company ones. Merely those can result in the level of performance that is
required for building a competitive advantage (Kumar et al., 2006). Many firms
understood the importance of this factor and have taken bold steps to break
down both inter- and intra-firm barriers to form alliances, with the objective of
reducing uncertainty and enhancing control of supply and distribution channels
(Gunasekaran et al., 2004).
41
One key aspect for reaching supply chain flexibility is to make flexibility available
in activities associated with procurement of materials. Many times it is the case
that the ability of the suppliers restricts manufacturer’s capability in making
prompt responses to customer requirements (Christopher, 2000).
Procurement functions are playing a critical role in establishing a connection
between supplier’s production activities and manufacturer’s production
activities. It makes manufacturing firms capable of adjusting internal production
demands with required materials and components at the precise time (Pujawan,
2004 ).
Sourcing flexibility is the firms’ supply chain’s structure competence to adapt to
changes; to readjust or reinvent the chain in response to market uncertainty and
change in customer requirements; to promptly send and receive products cost
effectively, and to design information systems with present supply chain units to
encounter changing information requirements (Stevenson & Spring, 2007).
Zhang et al. (2002) defined purchasing flexibility as “the ability of the
organization to provide the variety of materials and supplies needed by
manufacturing quickly and performance-effectively through cooperative
relationships with suppliers”. Duclos et al. (2003) defined supply flexibility as
“the ability to meet the changing needs of customers, changing the supply of the
product, including mix, volume, product variations and new products”. Swafford
et al. (2006) defined sourcing flexibility as “the availability of a range of options
and the ability of the purchasing process to effectively exploit them so as to
respond to changing requirements related to the supply of purchased
components”.
Sourcing flexibility includes the ability to ramp up production rapidly, the
capability of the supplier to adopt its production process to specific
requirements for some products, the capability to downscale and the capability
to gather up several partners that can be substituted according to changes in
customer needs (Duclos et al., 2003). The most salient part of the sourcing
flexibility is to provide flexibility in establishing relationships with partners.
Companies have a wide range of options in the domain of relationship from
soliciting short-term bids, establishing long-term and strategic supplier
relationships, forming joint-ventures, creating problem-solving inter-firm teams
or even integrating vertically. Providing flexibility in forming these relationships
along with efficient and effective management of them are key factors for
successfully meeting changes in customer requirements (Duclos et al., 2003;
Bensaou, 1999).
The definitions presented above may hold some fundamental limitations. First,
they have unchanged consideration over flexibility regarding all types of
procured components. As a result, they do not take this fact into consideration
that different procured components may ask for different levels of sourcing
42
flexibility and accordingly different sourcing strategies. Second, these definitions
did reflect on the different level of sourcing flexibility. A more appropriate
definition can make the connection between sourcing flexibility and dimensions
of uncertainty (e.g. volume, customization and delivery). Furthermore, applying
this approach may motivate the employment of certain practices instead of
others (Tachizawa & Thomsen, 2007).
The importance of supply management has been highlighted in several recent
empirical studies on supply chain (Chen & Paulraj, 2004). Consequently, this has
led to emphasized recognition of impact of sourcing practices on supply chain
flexibility (Swafford et al., 2006). Therefore, it got decided to put the
concentration of study on sourcing flexibility, which, according to Tachizawa &
Thomsen (2007), has been defined as the ability of the procurement function to
respond in a timely and cost effective manner to changing requirements of
procured components, in terms of volume, delivery date and product.
3.1.3.1 Drivers of sourcing flexibility
For assessing the required degree of flexibility at each functional dimension of
supply chain, the drivers of the flexibility at the relevant function should be
evaluated (Pujawan, 2004 ). In another word, in order to properly analyze the
supply flexibility structure of a focal firm, it is essential to distinguish why this
type of flexibility is needed (Tachizawa & Thomsen, 2007). A flexibility driver is
“a factor that determines the need for flexibility” (Pujawan, 2004 ). D’Souza &
Williams (2000) illustrated that flexibility drivers that determine the necessity
for providing sourcing flexibility, can be classified into external factors and
internal intra-firm factors. Internal ones are correlated with the characteristics
of the focal company and external ones are affiliated with the characteristics of
the firm’s upstream and/or downstream supply chain (Tachizawa & Thomsen,
2007).
Suppliers Focal company Customer
Upstream external driver
Internal driverDownstream
external driver
Figure 13-Nature of sourcing flexibility drivers (Tachizawa & Thomsen, 2007)
Flexibility drivers are directly connected to uncertainty because most of the
times flexibility is being considered as a reaction to an uncertainty (Tachizawa &
Thomsen, 2007). Christopher (2000) diagnosed three main types of uncertainty:
43
1) Volume uncertainty: The level of uncertainty associated with:
the actual volume needed of a specific component
the real volume of a specific component that will be received from
supplier
2) Mix uncertainty: The level of uncertainty associated with the precise
specification of a component
3) Delivery uncertainty: The level of uncertainty associated with the date
that a component will be:
needed
received from supplier
Flexibility drivers clarify the motivations and reasons that exhibit why sourcing
flexibility is required. Pujawan (2004) introduced 5 driving factors that
stimulating the need for sourcing flexibility. These drivers have been brought
into the explanation as followings.
Supply uncertainty
The factors such as competition in procurement of material, the existent of
alternative sourcing method, and the nature and accessibility statues of raw
material are typical elements contributing to supply uncertainties. The
characteristics of supply items directly influence the requirement for sourcing
flexibility.
Component commonality
Component commonality can be high, medium or low dependancy on the
quantity of common component or material that a company uses in its finished
products. Component commonality makes impacts on several performance
prospectives of production system.
Product life cycle
Product life cycle is a measurement on how long a typical product will stay in the
market before it got obsolete and be replaced by new product or newer
generations. This also can be the case that the product will not be able to
penetrate the market and necessitates other approaches. A short product life
cycle would indicate that the changes in product design are fast and production
is required to adjust itself to the evolutions in a timely and cost-efficiently
manner. Achieving this entails the suppliers to be able to cope with the changing
requirement of materials so product life cycle can be a driver of sourcing
flexibility.
Customer requirement disparity
44
This is being defined as the different speed and service level which may be
required from different customers.
Order stability
Order stability is being defined as the stability levels of the orders have been
placed by customers considering their due dates, quantity and specifications.
This is frequent case that customers change due dates, quantity and product
specifications of the orders that they place. These changes, especially when they
are not being communicated at the early stages, can cause several disturbances if
the supply network does not carry the required flexibility.
(Pujawan, 2004 )
Supply uncertainties
Component commonality
Product life cycle
Customer requirement disparity
Order stability
Sourcing flexibility
Figure 14-Drivers of sourcing flexibility (Pujawan, 2004 )
3.1.3.2 Sources of sourcing flexibility
Besides analyzing the reasons that why sourcing flexibility should be sought, it is
of high importance to investigate how it can be achieved in diverse situations
(Tachizawa & Thomsen, 2007). Different literatures offer different definitions for
flexibility sources. Jack & Raturi (2002) defined it as “specific actions to generate
flexibility”. Tachizawa & Thomsen (2007) defined it as a “practice in the
purchasing function that allows an increase in sourcing flexibility”. The definition
for sourcing flexibility that this report will take into consideration is the one that
has been presented by Tachizawa & Thomsen (2007).
45
Industry, product and supply market characteristics may be considered as
primary indications for sources of sourcing flexibility (Bensaou, 1999).
Furthermore, an appropriate deployment of sourcing strategies can be regarded
as a powerful source for sourcing flexibility. Latter will be explored further in the
discussion section of this report.
3.1.3.3 Dimensions of sourcing flexibility
If the sourcing function has adequate extra supply capacity in order to foresee
abrupt rises in the volume of required materials or components, the suppliers
have the capability to manage both rushed and delayed orders, and suppliers are
able to make changes in materials specifications in efficient and timely manner,
then the sourcing function is said to be flexible (Pujawan, 2004 ).
Sanchez & Perez (2005) proposed a hierarchical model regarding taxonomy of
supply chain flexibility dimensions. They constructed their model based on
bottom-up classification of flexibility as it can be found in manufacturing
systems. These classifications are basic, system and aggregate types. That made
them able to suggest different types of the supply chain flexibility dimensions.
Basic flexibility is related to capabilities at shop-floor level which can influence
supply chain. System flexibility considers capabilities at company level and
finally aggregate flexibility takes capabilities engaged with supply chain
structure into considerations (Sanchez & Perez, 2005).The first two levels can be
interpreted as operational level and the last one can be interpreted as strategic
level (Christopher et al., 2006).
This report took the same approach as Sanchez & Perez (2005) regarding a
taxonomy for the dimensions of sourcing flexibility. It considers sourcing
flexibility from three flexibility types of basic, system and aggregate with the
same definitions that have been proposed by Sanchez & Perez (2005). The
flexibility dimensions, that have been found relevant in relation to sourcing
flexibility, are namely: supply chain structure, product, delivery, and volume. The
selection of the first dimension, supply chain structure flexibility, is mainly due
to considerations over the defining elements regarding flexibility that has been
presented in the first part of this section (Table 1). Referring to table 1, the
second element that should be consider, in order to make comprehensive
definition over supply chain flexibility, is re-configuration flexibility (Stevenson
& Spring, 2007). The definitions of that element (Table 1) leaded to development
of the supply chain structure flexibility dimension. Following figure depicts a
schematic view over the sourcing flexibility dimensions that this report aims to
propose (Figure15).
46
Figure 15- Schematic exhibition of sourcing flexibility dimensions
Figure 16 depicts the above proposed dimensions from the perspective applied
by Sanchez & Perez (2005). The first two flexibility dimensions are related to
shop floor capabilities (basic flexibility) which are product and volume. The
following one dimension, delivery, is hierarchically positioned at company level
(system flexibility). The top flexibility dimension is perfectly linked to the
structure of the supply chain (aggregat flexibility).
Aggregate-Chain
System-Company
Basic-Shopfloor
Supply chain structure
Delivery
Volume Product
Op
eration
al level
Figure 16-Hierarchical exhibition of sourcing flexibility dimensions (Sanchez & Perez, 2005)
The definitions of the proposed four dimensions have been brought into
attention in Table 3.
Firm
Sourcing flexibility
Product
Volume
Delivery
Supply chain structure 1Supply chain structure 2
.
.
.
Supply chain structure n
47
Flexibility dimension Definition
Product flexibilityThe ability of the suppliers to produce customized product or upgrade existing
ones economically and with no additional time to meet customers’ required
specifications
Volume flexibilityThe ability of the suppliers to control the supply levels (increasing or
decreasing) economically and with no additional time to meet customer
demand
Delivery flexibilityThe ability of the supplier to deliver both rushed and delayed orders,
considering date of delivery, economically and with no additional time
Supply chain structure
The ability of the focal company to chain the structure of supply chain (e.g. add
or remove suppliers, selecting appropriate suppliers, usage of alternative
transportation and inventory methods, etc)economically and in a timely manner
to meet customers’ requirements
Table 3-Dimensions of sourcing flexibility inspired from Kumar et al., (2006) and Lummus et al. (2005)
3.1.4 Measurements and requirements
As pointed out in several literatures, one of the first stages in grasping the
importance and refining a competitive capability such as quality or flexibility is
developing the ability to measure it (Koste & Malhotra, 1999). In the existing
conceptual literature in the field of flexibility, three elements have been mainly
used to define any flexibility dimension. These elements distinguished as range,
mobility, and uniformity (Upton, 1994; Watts et al., 1993; Zhang et al., 2002). The
potential indicators for these three elements have been provided in Table 4.
Table 4-Elements and indicators of flexibility dimensions (Upton, 1994; Koste & Malhotra, 1999; Duclos et al., 2003)
Range is being characterized as the number of different situations, or flexible
alternatives that can be realized for a particular flexibility dimension. Mobility
denotes the level of simplicity with which the organization changes from one
state to another. It corresponds to the ability to suffer small transition penalties
Elements Indicators
Range Number of options
Mobility Transition penalties-time, cost, effort of transition
Uniformity Similarity of performance outcomes-quality, costs, time, etc.
48
within the range. These penalties are not concerned with the costs associated
with the acquisition or developing the range of flexibility. They merely describe
the efforts of organization in order to move within the range and evaluate the
complications of employing a flexible alternative (Upton, 1994). Transition
penalties can be considered as legitimate indications for flexibility. If a company
incurs lower degree of them for the same level of achievements in the number
and variation of options, then it can be claimed to be more flexible. Some
examples for those kinds of penalties could include but are not limited to the
time and cost of applying transition, the rescheduling attempts required
regarding the transition and etc. (Gupta & Somers, 1992; Upton, 1994). Mobility
can be improved by recognizing the tradeoffs between time and cost and making
efforts to increase the net sum of transition penalties (Koste & Malhotra, 1999).
The final element is uniformity. It grasps the similarity in performance outcomes
for the different flexible options within diagnosed range. Existence of several
volatilities in performance outcomes of different options specifies the less
flexible system (Upton, 1994). These performance differences are not one-time
consequences like transition penalties, unless they may hold their effects during
the whole period of adopting alternative option (Koste & Malhotra, 1999).
Uniformity can be evaluated by using a large number of performance measures.
These include efficiency, productivity, quality, processing times and product
costs (Upton, 1994).
Same approach can be applied for developing a framework for analyzing the
dimensions of sourcing flexibility.
The scopes of the value chain flexibility drop into two categories: capability and
competence (Stalk et al., 1992). Watts, et al., (1993) named these two categories
in a different way as primary flexibility and secondary flexibility relatively. This
classification scheme can assist managers in identifying flexible capabilities
critical to their customers and flexible competences that support these
capabilities. Flexible competences, which are internally focused, provide the
processes and infrastructure that enable firms to achieve the desired levels of
flexible capabilities. Flexible capabilities, which are externally focused, can be
viewed as a linkage among corporate, marketing, and manufacturing strategy
(Watts et al., 1993).
3.1.5 Implementation
Gerwin (1993) has proposed some directions on the flexibility implementation
issues. These directions have been mainly suggested for manufacturing flexibility
but they can also be generalized to other kinds of flexibility. Implementation
process is being discussed as a four-step approach. The first stage concerns
distinguishing the flexibility dimensions that require examination. The second
one regards measuring the gaps in the process of implementing and managing
49
flexibility. The third stage is engaged with choice of an appropriate method for
closing the gap. The final stage, which is being considered as the most notable
one, has certainly been based on continuous assessment (Gerwin, 1993). The
implementation framework suggested by Kumar et al (2006) is a three-stage
approach that its stages are in consistency with Gerwin’s (1993) framework.
Their proposed framework consists of the required flexibility identification
process as a first step which will be followed by implementation and shared
responsibility, and feedback and control as a final step of this cyclical approach
(Kumar et al., 2006). The first and final step of both frameworks are actually
implying same view and procedure. In the second step, Kumar et al (2006) have
integrated the second and third phase of Gerwin’s (1993) in to one step.
The first phase of Gerwin’s (1993) approach necessitates involvement of senior
managers in order to analyze the particular aspects of flexibility that are
required to be on the central focus. An organization requires evaluating its
external environment, uncertainties, and its relationship with suppliers and
customers in order to perceive and articulate its competitive strategy. This is a
prerequisite step to the development of other practical strategies, specifically:
marketing strategy, manufacturing strategy and other functional strategy
(Kumar et al., 2006). Virolainen (1998) has proposed a general framework for
formulation of the relevant procurement strategies. The procedure he suggested
is remarkably similar to the procedure in step 1 of Kumar et al’s (2006)
framework for implementation of flexibility. In Figure 17 and 18, these two
procedures have been brought up together in order to generate an integrated
framework.
Figure 17- Step 1 of Kumar et al’s (2006) framework for implementation of flexibility
Supplier’s charactaristics Environmental uncertainties Customers characteristics
Mission and organizational competitive strategy
Marketing strategy Manufacturing strategy
50
Figure 18- Virolainen (1998) framework for purchasing strategy formulation
Figure 19-Step 1 of Kumar et al’s (2006) framework for implementation of flexibility integrated with
Virolainen (1998) and Krause et al., (2001) framework
The evaluation of environmental uncertainties along with the supplier’s and
customers’ characteristics is based on this assumption that these aspects are
needed to compete in terms of range and speed (Gerwin, 1993; Kumar et al.,
2006). Environmental uncertainties imply a situation where organization is
encountering some planned and unplanned changes. These uncertainties force
organizations to consider some contingency plans that should be also
incorporated in business strategy. In other words, due to the existence of these
uncertainties organizations must consider and implement different types of
Environment Business mission
Corporate/business unit strategy1.cost
2.quality3.delivery
4.flexibility
Procurement strategy Other functional strategiesManufacturing strategy
Supplier’s charactaristics Environmental uncertainties Customers characteristics
Manufacturing strategy
Mission and corporate/business unit competitive strategy
1.cost2.quality
3.delivery4.flexibility
Procurement strategy Other functional strategies
51
flexibilities (Kumar et al., 2006). Furthermore, the requirement for the excess
flexibility should be considered in this stage. The required, actual and potential
level of needed flexibility types are being investigated in the first step by
managers (Gerwin, 1993). Yibing & Quanxi (2008) have proposed following
explanation for required, potential and actual level of flexibility.
Required flexibility: Considering the existing uncertainties in supply chain, it
denotes the level of flexibility needed to mitigate those uncertainties. It does not
regard the configuration of system flexibility, but the level and aim which system
flexibility may reach.
Potential flexibility: Considering the current structural characteristics of supply
chain, it refers to the level of flexibility that is inherent in that the existing
structure.
Actual flexibility: It refers to the level of flexibility currently existent in supply
chain considering supply chain’s structural characteristics and level of
management.
(Yibing & Quanxi, 2008)
The potential and actual flexibility defined above are in complete consistency
with dormant and active element proposed by Stevenson & Spring (2007)
orderly. Those elements are two of five defining elements that according to
Stevenson & Spring (2007) should be taken into consideration when to define
flexibility. The definitions of those elements have been previously been
presented in Table 1.
In order to formulate an accurate purchasing and manufacturing strategy, it is
needed to analyze the supplier’s characteristics (Pujawan, 2004 ; Virolainen,
1998). These characteristics can include but not limited to number of suppliers,
average size of the suppliers, level of specific investment in supplier, degree of
information sharing, and specifications of the contracts. This will help to analyze
the requirements and strengths of suppliers more comprehensively (Kumar et
al., 2006). As mentioned before all activities within a supply chain need to be
aimed or concentrated towards fulfilling consumers’ demands so evaluating
customers’ characteristics forms and indispensable part of strategy formulation
(Kumar et al., 2006; Gunasekaran et al., 2004; Virolainen, 1998). Based on the
supply chain functional strategies that have been distinguished in the first step,
the required supply chain flexibility types and level can be identifies (Kumar et
al., 2006).
In the second stage actual and required level of flexibility, that have been
identified in the first step, are being compared with each other. Then the possible
gaps can be measured. Required levels of flexibility are being identified by
mainly surveying customers and analyzing their demands. Potential flexibility
52
levels are being evaluated based on the capabilities of organization and
according to defined dimensions and elements of needed flexibility types. Finally,
the actual levels of flexibility are gained from the data concerning the current
performance of the organization. After measuring the gaps, appropriate methods
are needed to be developed for closing the identified gaps, between the required,
potential, and actual levels of flexibility (Gerwin, 1993). This can be achieved by
applying required flexibility tools such as information technology systems,
relationship with key supplier and customers, etc. Electronic data interchange
(EDI), customer relationship management (CRM), and enterprise resource
planning (ERP) are examples of some of the well-known information technology
systems. Furthermore, the shared responsibilities among different supply chain
partners must be defined in order to implement and manage the required supply
chain flexibility (Kumar et al., 2006). For example in the case of sourcing
flexibility, usually it is the capability of the suppliers that restricts the capability
of a manufacturer to promptly respond to the demands of the customers
(Christopher, 2000). But from supply chain perspective it is the shared
responsibility of the both supplier and manufacturer for implementing and
managing the sourcing flexibility (Kumar et al., 2006).
Continuous assessment is the final stage in both frameworks. It is required to
continuously monitor and control any potential changes in the required levels of
flexibility types (Gerwin, 1993). The main principle here is to constantly observe
and assess the strategic and operational fit between perceived flexibility types
and implemented flexibility types (Kumar et al., 2006). Suarez et al. (1991),
suggested that the perceived and required flexibility must be compared to
warrant that there is satisfactory fit. If implemented flexibility fits required
flexibility (there exists alignment between them), then it is expected that this
results in improvements in the business performance. If they do not fit this is the
responsibility of the monitoring mechanism to trigger an alarm. This is a warning
indicating that there needs some further modifications in the required flexibility
types or at the implementation phase in order to boost business performance
(Suarez et al., 1991).
53
Figure 20- Step 3 of Kumar et al’s (2006) framework for implementation of flexibility
3.2 Strategic procurement
Procurement refers to all activities that one company goes through in the
process of acquisition of products and services. Purchasing constructs the
operational part of procurement where the actual process of buying is held. On
the other hand, sourcing constitutes the strategic dimension of procurement
where sourcing strategies were developed and relationship with suppliers being
defined and analyzed (Favre & Brooks, 2002)
The main premise regarding strategic procurement is that the activities of the
procurement function should be based on strategies that are in alignment with
the corporate strategic plans. The aim here is to support the efforts of the firm in
order to accomplish its long-term objectives. The procurement can only be
interpreted as a strategic function if it has an integrative role in the business
unit’s strategic planning process (Carr & Pearson, 2002). The degree that
procurement is being characterized as strategic is highly dependent on how top
management views it as an important resource of the firm. There exists several
internal factors such as management style, the depth of procurement’s other
responsibilities, firm’s policies and the distribution of power, which influence the
perception associated with procurement (Ellram & Carr, 1994).
Strategic sourcing challenges many of the present ideas about how procurement
strategies are aligned with organizational ones, how the suppliers are being
selected and involved in projects and decision making processes regarding the
required strategic focus while making procurement attempts. The aim of
strategic sourcing process is to assure highest total value and most objective
outcomes for the company (Favre & Brooks, 2002). Its particular focus can be
drawn on effective management of the supply base by detecting and selecting
suppliers appropriate for strategic long-term cooperation, getting involved into
supplier development initiatives by effectively distributing resources to boost
Control Mechanism
Flexibility fitFlexibility types implemented
Perceived flexibility
Business performance
54
supplier performance, delivering benchmarks and regular feedback to suppliers,
and also interfering in activities regarding omitting unfavorable suppliers
(Talluri & Narasimhan, 2004).
Favre & Brooks (2002) presented an extensive definition for sourcing processes.
Figure 21 exhibits a schematic description of sourcing processes, where it
initiates, where it finishes, and the procedures associated with each step.
When supply chain sourcing is aligned with strategy, it is capable of influencing
organizational performance. It is noteworthy that supply chain must be designed
as an integrated system where entire chain is being viewed as one whole entity,
and measured extensively across the whole chain (Lau et al., 2003).
Define
Strategy
Supplier
Pre-
qualification
Establish
Contracts
Manage
Supplier
Relationships
Recognize
Needs
Generate
Order
Receive
Materials
Settle
Invoice
Purchasing
(Operational
procurement)
Procuremen
t process
Sourcing
(Strategic
procurement)
Assess
Opportunities
Profile
Categories
Internally
and
Externally
Develop
Strategy
Screen
Suppliers
and
Selection
Factors
Conduct
Auditions
and RFPs
Shape and
Negotiate
Value
Propositions
Implement
Agreements
Sourcing
activities
Outcomes
Categories
in scope
Cross-
functional
sourcing
teams
Category
profile
Industry
profile
Category
strategy
Supplier
selection
criteria
Short-list of
suppliers
Shortages
Areas of
improvement
Fact-based
negotiation
packages
Category
value
propositions
Benefit
realization
Continual
supplier
improvement
Figure 21- Strategic sourcing processes (Favre & Brooks, 2002)
55
3.2.1 Define strategy
A company’s competitive strategy preferably expresses how the company is
going to compete in the market and acts as a driver of the diverse functional
strategies. A functional strategy indicates how a functional department is going
to back up the firm’s business strategy and how it will supplement or foster the
other functional strategies (Krause et al., 2001). First step in taking any sourcing
initiative is to evaluate the firm’s strategic and tactical procurement
requirements (Favre & Brooks, 2002). Corporate competitive priorities – such as
reducing total costs, being innovative, quality and performance differentiation
and/or enhancing the level of flexibility – are the main factors that shape the
basis for suppliers’ evaluations (Favre & Brooks, 2002; Krause et al., 2001).
Segmentation of the procured items is the first step for the development of a
tailored sourcing strategy (Stolle et al., 2008). Commonly, a product-category
analysis is required in order to segment purchases into a practical number of
segregated groupings (Favre & Brooks, 2002). It is the responsibility of sourcing
practitioners to certify the mission and scope of each product category in
cooperation with other departments such as manufacturing and R&D.(Ref)
Historical procedures that have been applied for procuring components along
with their supply market characteristics can be suitable starting points to initiate
component analyses (Kocabasoglu & Suresh, 2006).
Subsequently, the company has to generate and evaluate, for each category
individually, different sourcing strategies and decide on the requirements and
criteria for the selection of suppliers which procuring differentiated segmented
items (Stolle et al., 2008; Favre & Brooks, 2002). These strategies are being
developed based on parameters such as price, quality and flexibility equipped
with insights about the organization’s strategic priorities and the industry’s
environment (Pagell et al., 2010).
3.2.2 Pre-qualify suppliers
One nifty tool for executing this step is to build out supplier information
matrices. Those can be concentrated on supporting the strategic and tactical
procurement goals related to each procured items category (Favre & Brooks,
2002). Furthermore, the performance data of the suppliers that the firm is
already making business with them is a reliable indication for making supplier
evaluations. Based on making considerations on the firm’s strategic procurement
goals, firm is able to distinguish several relevant factors that are influential on its
aim to reach those goals. One beneficial step here is to assign relative importance
to each factor. Based on those weights and observatory data generated from
supplier information matrices, sourcing practitioners can prepare a short list of
prequalified suppliers to compete for a specific contract. Additionally those data
56
can lead to strengthen the company’s supply base toward the company’s
strategic directions (Pagell et al., 2010).
3.2.3 Establish contracts
Depending on the characteristics of the product and the supplier industry,
buyers have several sourcing options. Companies may select only one supplier
out of the supplier competition or most of the times they may usually choose to
contract with a multiple number of suppliers. This would be done in order to
mitigate supply risk and over dependence on one company. Regardless of
whichever way would be taken most contracts necessitate further negotiations
to settle lawful details and business procedures (Favre & Brooks, 2002).
3.2.4 Manage supplier relationships
On a continuous basis, procurement practitioners must be capable to track the
performance of suppliers. This is a necessary procedure for making future
evaluations. On-going assessment on the performance of suppliers will make
firms able to appropriately manage their future relationship with the suppliers,
follow-up compliance with the contracts; recognize and fix problems with
products or delivery, and collect the necessary information that will be required
when a contract approaches for renewal (Favre & Brooks, 2002).
3.3 Purchasing Portfolio Models
Portfolio models have primarily been used in strategic decision making to
support resource allocation decisions, by identifying which groups of products,
suppliers, or relationships that require greater attention than others. It is
thereby also seen as a useful management tool (Olsen & Ellram, 1997). From the
perspective of the purchasing function, it is a relevant approach to consider
purchasing portfolio models in order to support decisions regarding establishing
different kinds of supplier relationships (Wu & Barnes, 2011). For defining the
portfolio concept the following description has been found relevant:
“The portfolio concept reflects the importance for balance in a collection of
individual elements. […] The basic idea is simplification of a complex problem (1)
by classification of objects/subject in a (usually) two dimensional matrix and (2)
by providing (strategic) recommendations for each cell of the matrix.”
(Gelderman & Weele, 2000).
The main purpose of portfolio models in purchasing management is being
considered to improve the allotment of limited resources. This can be done via a
presumably efficient method to recognize which groups of products, suppliers,
or relationships necessitate higher level of attention than others (Olsen & Ellram,
1997).Kraljic (1983) introduced the first comprehensive portfolio approach for
purchasing and supply management (Gelderman & Weele, 2003). Olsen & Ellram
57
(1997) developed a model based on Kraljic (1983) which aims to understand
how to manage supplier relationships.
Study of the models proposed by Kraljic (1983) and Olsen & Ellram (1997)
shows that they took somehow same approach to analyze a company's supplier
relationships. This approach includes three steps applied by both authors while
the steps have different terms by the different authors. These three steps are:
Analyze the purchased items and classify them in order to determine the
ideal relationship types for different categories of procured items
Analyze the current relationship of the company with supplier
Develop action plans in order to adapt its current strategies (step 2) to
the ideal situation(step 1)
(Kraljic, 1983; Olsen & Ellram, 1997)
3.3.1 Categorization
In order to devise a tailor-made supply strategy, while maximizing the buying
power and at the same time decreasing the supply vulnerability Kraljic (1983)
recommends the following approach.
The first phase is called classification and aims at differentiating the purchased
material. According to Kraljic (1983) a company’s supply strategy depends on
two factors; the importance of purchasing and the complexity of the supply
market. The definition of purchasing importance can be made in terms of volume
purchased, percentage of the total purchase cost, impact on product quality,
impact on profitability etc. The supply market complexity, on the other hand, is
assessed in terms of the number of suppliers, availability, competitive demand,
substitution possibilities, logistic aspects, complexity and so forth. After selecting
suitable criteria for both dimensions, all purchased items are evaluated and
positioned into one of the quadrants of the Kraljic portfolio model (Kraljic,
1983). Following the work of Kraljic (1983), Olsen & Ellram (1997) suggested a
portfolio model with the “strategic importance of the purchase” and “the
difficulty in managing the purchase situation” as the two key classification
dimensions. The factors that Olsen & Ellram (1997) described for two
dimensions of their model are remarkably close to the factors introduced by
Kraljic (1983).
Both Kraljic (1983) and Olsen and Ellram (1997) have one dimension
demonstrating the company’s internal circumstances and one dimension
expressing the external environments. After comparing these two authors´
dimension pairs, these dimensions have been found quite similar and possible to
combine. In order to form the foundation of classification, the subject titles that
should be defined for each dimension in the portfolio matrix should be decided.
This thesis defines the subject titles for the dimensions as “Strategic Importance
of Procured Items” on the vertical axis and “Complexity of Supply Market” on the
58
horizontal axis. These are inspired by the ones developed by Kraljic (1983) and
Olsen and Ellram (1997). Furthermore, the portfolio matrix would be divided
into four quadrants. The names of quadrants have been defined in the same way
as Kraljic (1983) and Olsen and Ellram (1997). These quadrants are namely non-
critical, leverage, bottleneck and strategic. The foundation of the categorization
tool is depicted in Figure 22. Each of the quadrants has a separate purchasing
approach which requires information of a different kind for developing a suitable supply
strategy. Also, the tasks for the four groups are diverse with regards to the differences in
purchasing and supply risks (Kraljic, 1983).
Leverage items Strategic items
Non-critical items Bottleneck items
Stra
tegi
c Im
port
ance
of P
rocu
red
Item
s
Complexity of Supply Market
HighLow
Hig
hLo
w
Figure 22- Foundation of categorization tool inspired from Kraljic (1983) and Olsen and Ellram (1997)
Table 5 summarizes the relevant factors that this study used for the “Strategic
Importance of Procured Items” dimension. This dimension focuses on internal
factors to the firm.
59
Factors influence the strategic importance of procured items
Degree of contribution to the cost of the final product Degree of infleunce on the quality of the final product Length of leadtime Degree of infleunce on the on-time delivery of the
final product Level of technological competence
Table 5-Factors influence the strategic importance of procured items
Table 6 summarizes the relevant factors that this study used for the “Complexity of
Supply Market” dimension. This dimension concentrates on external factors to the
firm.
Factors influence the complexity of supply market
Number of available alternative suppliers Degree of technological request on supplier Level of difficulty to switch suppliers Logistic cost and complexity Cost of non on-time delivery Degree of impact of customer request on selection of
the supplier
Table 6- Factors influence the complexity of supply market
3.4 Relationship between strategic sourcing and sourcing flexibility
The impact of specific sourcing practices on sourcing flexibility has been investigated by several authors. However, there still exists a deficiency in studies that illustrate how these numerous practices can be combined in order to escalate and improve sourcing flexibility. Additionally it can be the case that under some circumstances, considering product or supply market characteristics, a set of sources could play a supportive role in relation to another (Tachizawa & Thomsen, 2007). The principal objective of strategic
60
sourcing is to reduce uncertainty and making improvement in flexibilities when system encounters supply, competitive, and demand uncertainties (Jack & Raturi, 2002).
As cited in Pujawan (2004), Chang et al (2001) conducted an empirical study on
the relationships between business strategy and manufacturing flexibility. They
applied six dimensions of manufacturing flexibility. These were; product,
product mix, product modification, volume, delivery, and service. They proposed
that companies should select proper dimensions of manufacturing flexibility and
related those dimensions with the suitable strategy in the firm. Their study
suggested that developing manufacturing flexibility and business strategy will
provide firms with competitive advantages. Therefore, firms should devote time
and resources to cultivate manufacturing flexibility that can fit into their
business strategies (Pujawan, 2004 ). The same approach holds true regarding
sourcing flexibility and firms can assign resources to develop sourcing flexibility
that can fit into their business strategies.
A more integrated analysis over sourcing practices (i.e. recognizing strategies
constructed on sets of sourcing practices) can be found in the literatures
regarding purchasing portfolios (Tachizawa & Thomsen, 2007). Several authors
have proposed some frameworks in order to categorize suppliers and the
corresponding sourcing strategies (Kraljic, 1983; Olsen & Ellram, 1997; Bensaou,
1999). Two of these models have been explained in above texts.
In this research, sourcing fit is being defined as the perfect strategic consistency
between a product’s specifications along with supply and demand characteristics
(such as predictability of demand, product’s length of life-cycle, product variety,
lead-times, specific market requirements, and explicit inherent characteristics of
products) and sourcing strategies (such as inventory strategy, and supplier
selection methods).
61
Section 4 Empirical Study The study's empirical data was collected from a case company, Bombardier
Transportation Västerås. To catch an understanding of the business needs of the
purchasing flexibility, this section first presents the background of the company along
with the overall organization and its supply chain and how the organization is
working on this. Furthermore, brief descriptions of four different chosen items are
presented. Then available dimensions of sourcing flexibility in company’s
procurement department have been investigated. Data on the available flexibility
collected, from each dimension of sourcing flexibility, by describing how the process
works in order to gain access to that dimension. For each dimension, the section
discusses finally how the company works to create that dimension of sourcing
flexibility internally and also upstream in the supply chain.
4.1 Company background
Bombardier is a global transportation company that operates in two industry-
leading businesses: aerospace and rail transportation. The company was
founded in 1942 by Joseph-Armand Bombardier to build snowmobiles. The
company designs, manufacture, sell and support products in these two sectors
(Bombardier Internal Portal, 2012).
Oil scarcity, escalating energy price, environmental awareness, urbanization, and
population growth are few drivers fuelling the evolution of greener mobility. By
2025, the planet’s top 600 middleweight and mega cities will have two billion
inhabitants and generate nearly 60% of the world’s gross domestic product
(Dobbs et al., 2011). China only presents a enormous opportunity to connect its
many large cities with segment-leading regional trains. Investing in sustainable
mobility is crucial to ensuring these centers’ quality of life, productivity and long-
term competitiveness.
The unique dual focus, Bombardier has, will contribute maintaining the
freedoms of movement and help cities breathe. Bombardier’s industry-leading
international capability is based on their strong local roots and the global
knowledge they foster among their sites. Bombardier is present in more than 60
countries, with 76 production and engineering sites among them and have over
70 000 employees (Bombardier Internal Portal, 2012).
4.1.1 Bombardier Transportation
Bombardier Transportation is the global leader in the rail industry. They offer a
broad portfolio of efficient products and services, covering the full spectrum of
rail solutions, ranging from complete trains to sub-systems, maintenance
services, system integration and signaling. These rail transportation solutions
are divided in six divisions:
• Rail vehicles
62
• Propulsion and controls
• Bogies
• Services
• Transportation systems
• Rail control solutions
4.1.2 Propulsion and controls
This division has approximately 3000 employees worldwide, which are divided
to 10 sites present in eight countries. The headquarter is placed in Zurich,
Switzerland.
Without propulsion and control equipment, no railway vehicles can move. The
propulsion system in a train is responsible for bringing in the required power
that makes the trains move to the required speed. In the end, this equipment
defines the vehicle performance. It is often mentioned as the heart, muscles and
brain of the train.
4.2 Organizational structure
Figure 23 depicts the organization structure of Bombardier on its path to meet
the requirement of customers.
Västerås Propulsion
and control (VAPPC)
Sales
Project
Management (PM)
Operations
Procurement
First delivery plan Delivery plan agreed
”Order to Operations”
- Routine, tools etc for PM
- Production planner. Workload smoothing
Project Management Office
(PMO)
Project Manufacture Manager
(PMM)
Project Procurement
coordinators
Request on material in system (BaaN)
- Logistics
Operative Procurement
Strategic Procurement
- Contracts- First delivery plan
- Call-off to suppliers - Forecast
Figure 23-Organizational structure of projects
63
People from sale department agree the first delivery with the customer. This
draft version of the delivery plan will be sent to Project Management department
and assigned project managers related to each project. They develop and set the
order to operation. Project manufacture managers do the production planning
and smooth the workload and make the required allocations. Based on the
planned production, the requirement of materials, needed for carrying out the
production, would be determined. Operative purchasers follow up the delivery of
material according to pre-scheduled plans.
4.3 Procurement strategy
The purchasing organization and strategy of Bombardier is divided into the
numbers of different groups of commodities. Each group has operational
purchasers, strategic buyers, and global buyers with different responsibilities.
Operational buyers manage the daily contact with suppliers and the ongoing
planning of materials. A strategic buyer manages the long-term relationship with
suppliers, evaluates and develops the principle of these relationships. Global
buyers have global responsibility for a group of the purchaser and they ensure
long-term relationships but also for the procurement strategies of Bombardier.
Within all commodity groups, the strategy relies on long-term supplier relations
that will enhance and sustain a number of performance indicators, which are
quality, delivery, cost and innovation. Quality is continuously evaluated through
a failure rate, less than 500 ppm (part per million), which the suppliers must
achieve. Delivery is measured by the percentage of deliveries from the supplier
that is departing on time (On Time Delivery, OTD). Bombardier desires suppliers
to have a standard of 98 percent over the long term to be presented as vendors.
Cost of purchased item shall incessantly be reduced by joint improvements that
will increase the supplier’s productivity through developed production,
organization and design. Innovation will help to improve the product and
improve the other priorities. Supplier will do this through sharing of ideas of
how product design, specifications and tolerances can be altered to improve the
product.
Based on the complexity of an article’s supply market, the availability of in-house
expertise, and the share of annual purchasing volume Bombardier has
categorized its suppliers in different levels. The following levels are available:
• Supplier A – The supplier delivers strategic component groups. It has a volume
share of more than 1% of the annual purchasing volume.
• Supplier B1 - The supplier delivers leverage component groups. It has a volume
share of more than 0.5% of the annual purchasing volume.
• Supplier B2 - The supplier delivers leverage component groups.
64
• Supplier C - The supplier delivers noncritical component groups. It has a
volume share of less than 0.5% of the annual purchasing volume.
• Supplier D – The supplier owned by (contracted by) another part of
Bombardier.
4.4 Analyzed project
This project has elapsed since 2006 and the final delivery is planned to be in
august 2014. The objectives for the project are to design, manufacture and
deliver propulsion equipment for a large European public transportation
company. All equipment for the 172 trains that are to be delivered needs to be
homologated and tested before. The trains are gradually delivered and come
with two years warranty support. The customer is free to define final layout up
to six months after receiving the notice to proceed. Several modules proposed,
among which the customer will determine their final choice of interior and
layout. This layout will be fixed for the 50 first trains, and after these the
customer can choose a new layout for minimum 30 trains, and so on. Bombardier
has put up reliability targets in different levels, if these can not be attained
penalty fees are charged depending on the level of the target. There are five
stakeholders who stand to gain or lose from the success or failures of this
project:
- The users and owner of the trains
- The supplier of the trains with propulsion
- The supplier of the bogies with gears and motors from PPC
- PPC Division
- PPC Project, the team developing and delivering the propulsion and drives
equipment
By creating a collaborative, mutually beneficial relationship it allows these
stakeholders to deepen mutual understanding about issues at hand, explore and
integrate ideas together and, generate new options and solutions that mat not
been considered individually. It will also help the project to identify and resolve
areas of conflict and ensure the long-term availability of resources to achieve
mutual goals.
4.4.1 Deliverables
There exist two types of deliverables to the customers. The first category is the
products that are being manufactured in-house by VAPPC. The second one is
related to components that are being delivered to customers directly from the
suppliers. VAPPC does not do any kind of operation on the second group, and this
group is being called as by-pass components. Both of these types are fully
65
customer order driven. The lead time for internally-manufactured products is
around 26 weeks.
4.5 Supply chain structure
Following figure depicts the supply chain structure of the analyzed projects. It
exhibits the engaged processes and steps in delivery of deliverables to final
customers.
Final
Customer
MLM(internal
customer)
PPC
operation
Suppliers for
operation
products
Coupling
halves
supplier
Traction
motor
supplier
Break resistor
supplier
Main
transformer
supplier
S25 supplier
Gear box
supplierAxels supplier
Wheel sets
supplier
Bogies
supplier
Speed sensor
supplier
PPC Transport
PP
C T
ran
sp
ort
PP
C T
ran
sp
ort
PPC Transport PPC Transport
PPC Transport
PPC Transport
PPC Transport
PPC Transport
PP
C T
ran
sp
ort
Figure 24-Supply chain structure of the studied project
4.6 Selected items
In this part, brief descriptions about the items that were selected for further
analysis have been brought together.
4.6.1 Item 1-Speed Sensors
Speed sensors for sensing toothed wheel targets are available in a wide range of
types. Almost any installation requirement can be accommodated with different
cable and connectors. For example, a wheel speed sensor or vehicle speed sensor
(VSS) is a type of tachometer. The most basic use of these is to provide
information about the speed to the speedometer. This information is also used be
the cruise control system and to measure engine revolutions per minute (rpm).
66
Many of the subsystems in a rail vehicle, such as locomotives or multiple units,
depend on reliable and precise rotary speed signal. This applies in particular to
traction control, door control, train control, registration, wheel slide protection
etc.
For the early analogue sensors, they often functioned unsuccessfully or were not
reliable enough, and gave rise to vehicle faults. Even digital models were
affected, mainly due to the extremely harsh operating conditions encountered in
rail vehicles.
4.6.2 Item 2-Low Inductive Busbar
A busbar is a strip or bar of copper, brass or aluminum that conducts electricity
within electrical apparatus such as switchboard, distribution board, and
substation or battery bank. These bars are used in place of wire that would be
hard to bend and fit into tight spaces. They are easily formed into abnormal
shapes to accommodate connections of the incoming power source to internal
equipment. The bars can also easily be extended if another section is in need of
future expansion.
4.6.3 Item 3-Connectors
Connectors are electro-mechanical devices that exist on the end of electrical
conductors and are intended to facilitate interconnection with other leaders.
They come in two variants, male plug and female receptacle. The connection may
be temporary or as a permanent electrical joint between two wires or devices.
There are multiple types of connectors and the technology level is quite low.
4.6.4 Item 4-Power Semiconductors (IGBT)
Power semiconductors, also known as Insulated Gate Bipolar Transistor (IGBT),
is a device primarily used as an electronic switch and in newer devices is noted
for combining high efficiency and fast switching. These switches are to be found
everywhere in modern appliances like trains, refrigerators, lamps, computers
etc. At VAPPC, IGBTs are used for mainly two reasons:
1. Controlled rectifiers – convert AC to DC
2. Controlling AC motor – convert DC to AC
4.7 Changing volume and delivery schedule
Figure 25 depicts the procedure that Bombardier is going through when the
order’s volume or delivery date is being modified by the customer.
67
PM
PMM
Operative Purchaser
Production Planner
Master Planner
Customer
PPC
Operations Planning
Supplier response
Order to operation
Supply Op. Procurement
Master planning schedule updateMPS material control
Projects
Operations projects
Delivery schedule update
Operative Purchaser
Purchase order analysis
Parameter analysis
MRP update
New agreed production plan with corresponding material
supply
Purchase order update
Supplier
Figure 25-Schematic exhibition of process of changing volume and delivery date
The procedure is extremely close to the initial steps of launching a new project.
First customer should announce its required changes in the form of MPS (master
production plan). Then project managers assess the feasibility of requested
changes. If they find that changes are possible to take place, it would be directed
to PMMs (project manufacture managers). They reschedule the production plan
according to requested changes and consequently new delivery date and volume
for materials from suppliers would be resulted. Operative purchasers negotiate
the feasibility of this new delivery date and volume with the suppliers. If it get
confirmed then delivery plan for the customer would be changed according to
customers’ requests. It should be noted that there always exists a frozen window
for requested changes in delivery volume and dates. This frozen window is
around two months. It means that requested changes from the customer that
regarding the delivery dates and volume in the period of two months from
request date, cannot be applied.
68
4.8 Changing product specification
Changes in product specification can root from two factors. First can be the
requirement of the customer or designer to make improvements and second can
be related to the existence of some kinds of malfunctionality in current
specifications. The procedure of approving the requested changes in the
component specification may take up to 6 months. The process is usually as
following. First a modification request is being released either based on
customer request or due to vulnerabilities or opportunities found by production
specialists. Then a meeting would take place to justify the requirement.
Accordingly several feasibility tests and investigations would be executed to
approve the changes. When the changes approved, from that point of view the
new requirements would be set for the suppliers.
4.9 Changing structure of supply chain
Table 7 exhibits the typical procedure associated with adding new supplier and
changing the structure of supply chain. This process consists of three main
section which are (1) market analysis (2) selection of suppliers (3) negotiation
and signing contracts. The sub procedures associated with these three main
steps are totally fluctuating according to the characteristics of components. This
procedure can take up from approximately 5-6 month for noncritical
components to more than 1 year for strategic components.
Months after start of project
Market Analysis
Phase / Actvity
Screen potential suppliers/draw
up a list of suppliers
Selection of supliers
Request proposals
Conduct testing and
technological approvements
Hold technical discussions, set
objectives
1 2 3 4 5 6 7 8 9 10 11 12
Building prototypes or samples 1-6 months or even more(uncetain)
From some weeks to several months
Negotiation/Contract
Conclude contract
13
2-3 weeks to appx 2 months
14
Appx 1 month
Fixed
Variable for different categories
Table 7-Summary of procedures for changing the structure of supply chain
69
Section 5 Results In this chapter, the results from the case study will be described. The results section of
the thesis is dedicated to explaining Bombardier‘s current procurement strategic
direction and the results of attempts which have been done in order to categorize the
procured components.
5.1 Procurement strategic direction
Figure 26 presents the results of the first survey. This survey aimed to grasp the
importance of 5 factors in relation to each other. The target respondents for this
survey were 17 managers at to organizational level. They were asked to rank 5
factors of cost, delivery, flexibility, quality, and delivery based on their order of
strategic significance regarding purchasing functions. A sample example has
been illustrated as following in order to make the figure more understandable.
The columns show the number of individual that have put one specific factor in
related ranks. For example, if the 1st place column would be considered, it shows
that 9 different individuals placed quality in the first place of ranking.
Subsequently the column exhibits that one individual placed technological
competence as the first position, one individual placed cost, and another
individual placed flexibility in the first place. There was no one who puts delivery
in the first rank. The rest of figure’s column can be also interpreted in the same
manner as previously mentioned.
Figure 26-Result of the first survey, aimed at finding the weights of factors
1st place 2nd place 3rd place 4th place 5th place
1
3
5
2 1
9
1
0
1
1
1
0
2
4 5
0
5
2 3
2
1
3 3 2
3
Result of first survey
Cost Quality Flexibility Delivery Technological comptetence
70
Based on the positions that each factor gained in the first survey, a relative score
was calculated for each factor. Each place in the ranking has its own score and
this score was dedicated to the factor that has been placed on that rank. After all,
the cumulative score of each factor was calculated which has been exhibited in
Figure 27.
Figure 27- Relative score of distinguished factors
5.2 Procured items categorization
Based on the earned relative score for each factor, the Wight of that factor was
calculated. This weights in combination with the results of second and third
survey resulted in categorization of procured components. The target
respondents of second and the third factor were strategic purchasers. They set
the score of each factor for each component. The score of each factor for each
component was multiplied with the weight of that factor, and the position on the
vertical axis was spotted. For the horizontal axis, the study applied cumulative
approach. The scores of each factor for each component were added together,
and the position of component on the horizontal axis was spotted. Figure 28
depicts the distribution of components in four categories. 51.8% of 54
components were categorized as strategic, 13% as leverage, 7.4 % as noncritical,
5.6% as bottleneck, and finally no response received from strategic purchasers
for 22.2% of components.
37
52
24
34 33
0
10
20
30
40
50
60
Relative score of distinguished factors
Relative score
71
Leverage Strategic
Non-critical Bottleneck
Complexity of supply market
Str
ate
gic
imp
ort
an
ce o
f p
rocu
red
ite
m
13% 51.8%
7.4% 5.6%
No response: 22.2%
Total number of components: 54
Figure 28-Results of categorization
5.2.1 Strategic components
Strategic components are of immense strategic importance to the company but they also share a highly complex supply market due to low number of suppliers and/or high degree of technological request on suppliers. These items have high strategic importance because they should usually be supplied with strict specifications. For some of these kinds of items, only one or exceeding few sources of supply are available. This supply structure cannot be changed in the short run without incurring considerable cost. Some example s of strategic components includes high-tech and high-volume or price customer-specific products. Purchasing costs of such components are usually high. They contribute to reinforce not only the overall strategy of the company but also to support the core competences of suppliers. Accordingly, the appropriate strategy for strategic components can be to establish partnership with relevant suppliers.
5.2.2 Leverage items
Leverage components enjoy high strategic importance to the company but, on
the other hand, they have high market availability and low level of supply market
complexity. They may significantly contribute to company growth strategies. The
company has the responsibility to ensure the stocks for leverage components to
never run out because there would be the case that the consumption rate of
leverage components be exceptionally high.
72
5.2.3 Bottleneck items
Bottleneck components share significant level of vulnerability with respect to
their complexity of supply market while they contribute little to profitability and
strategic growth of the company. Such components have a tendency to have high
purchasing cost because there may be devilishly few available suppliers in the
market. Also, it can be the case that customers may put extremely strict requests
regarding those components that make their supply market immensely complex.
The crucial strategy for bottleneck components would be to avoid delivery
shortages. These shortages may jeopardize the production which may result to
losses of sales and reputation.
5.2.4 Noncritical items
Noncritical components have a low level of strategic significant to the company. In addition, they are widely available in the market and have very low level of complexity in their supply market. The strategic aim for noncritical components can include; reducing the number of components in this category, focusing on other factors such as a cost rather than main strategic factor for the company, eliminating small volumes spending, rationalize the number of units in order to control cost.
5.2.5 Placement of selected samples
One sample component from each category was selected for further
investigations. Table 8 summarizes the characteristics of the selected
components.
Speed Sensors
Charactaristics
Article
Low Inductive Busbar ConnectorsPower Semiconductor
(IGBT)
Purchasing cost
Impact of article qulaity on the
quality of final product
Length of leadtime
Impact of article on-time
deleivery on the on-time delivery
of final product
Article’s level of technological
competence
Low
Moderate
8-10 weeks initially
then 2-4 weeks
Not significant
Low
Supplier baseMultiple sourcing(one
for each project)
Moderate
Moderate
10-18 weeks
Moderate
Moderate
Parallel sourcing for
each project
Low
Moderate
10-14 weeks
(depends on
customization)
Moderate
Moderate
Multiple sourcing
High
High
12-26 weeks
(depends on supplier)
Highly significant
Moderate
Multiple sourcing
73
Supplier’s required level of
technological competency
Number of available suppliers
Level of difficulty to switch
supplier
Logistics cost and complexity
Cost of none on time delivery
Impact of customer request on
suppliers selection
4( many alternatives
available in the
industry)
Moderate
Fairly easy
Low
Moderate
Low
Purchasing region Europe
3( many alternatives
available in the
industry)
Fairly high
Europé, Asia, North
America
Moderate
Fairly low
Fairly low
Fairly low
8
Fairly high
Europe
Very difficult
Low
Moderate
Highly influential
4 (2 are mainly being
used)
High
Europé, Asia
Difficult
High
High
Influential
Table 8-Characteristics of selected components
Based on above presented characteristics, following figure exhibits the position
of each selected component on the developed purchasing portfolio matrix.
Leverage Strategic
Non-critical Bottleneck
Complexity of supply market
Str
ateg
ic im
port
ance
of p
rocu
red
item
1
Speed sensors 3
Connectors
2
Low-inductive busbar
4
Power semiconductors
Figure 29-Position of selected components
74
Section 6 Analysis
In this section, the above presented empirical study is going to be analyzed
through step-by-step mapping of how access to flexibility from the suppliers is
being influenced, and can be altered. As a starting point in this analysis, it is
considered crucial to understand the needs of the sourcing flexibility that exists
in the case study. This is the basis for the section 6.2 where the need by the
uncertainty in demand from three aspects of volume, delivery date and
customization are identified. After that, in Section 6.6, the different types of
sourcing strategies have been analyzed where their impact on sourcing flexibility
at various levels of strategic and operational has been brought into discussion. It
compares the different levels of sourcing flexibility related to different categories
of procured items.
6.1 Business unit strategy and flexibility
As it exhibited in the previous section, the first priority in strategic direction of
procurement inside Bombardier is to ensure the quality of final products. This is
being done by put the concentration of purchases on quality. Suppliers are
strictly being evaluated based on the quality of the material they provide. This
proves that quality has been well sensed and integrated in purchasing strategic
direction.
According to the current request of top management, VAPPC needs to be more
responsive towards customer demands. This would highlight the significance of
flexibility as indispensable requirements for customer responsiveness. As it can
be observed from the results of the first survey (presented in figure 27),
flexibility has the lowest relative score. This score would indicate that the
strategic importance of flexibility is being highly neglected. Top managements
are ranking flexibility as the lowest strategic direction for the procurement
function while simultaneously they emphasize the requirement for customer
responsiveness.
6.2 The necessity of flexibility
Referring to the theoretical part of the report, three types of uncertainties can be
considered as the drivers for the sourcing flexibility. These types of uncertainties
are volume, delivery date and mix flexibility (Christopher, 2000). In the case of
Bombardier, all of these three types were detected. The observations regarding
associated uncertainties will be brought into attention in the followings.
It should be noted that production in the case study is fully customer order
driven and procurement forecasts are based on known and unknown demand.
6.2.1 Volume uncertainty
VAPPC was supposed to procure customer with deliverables for 63 number of
train sets from February 2011 until April 2012, according to production schedule
75
released in February 2011. This data are just related to the mere project that this
report investigates and does not reflect the whole delivery plan of VAPPC. Figure
30 tracks the changes in the number of TS (train sets) that should be delivered
based on different MPS (master production schedule) released by project’s
customer. The figure exhibits the change in the number of requested TS over
time. The initial delivery number of 63 train sets has decreased substantially to
40 in the schedule released in March 2012, a year after. Each train set has 10
deliverables which are being produced in VAPPC (referred to as operation
materials) and 11 deliverables which being shipped to the customer directly
from the supplier side (referred to as by-pass materials). The resulted 23
difference in the number of requested train sets would indicate 230 difference in
the requested number of operation components and subsequently 253 difference
in the requested number of by-pass materials. This proves the difficulties
associated with forecasting of the materials’ volume that should be procured
from suppliers.
Figure 30-Change in volume
6.2.2 Delivery dates uncertainty
In addition to the volume uncertainties presented above, the studied project was
prone to high level of uncertainties associated with products’ delivery dates. For
efficiency in the analyses, in this report just the changes in delivery date which
were over two weeks have been considered as relevant and consequently the
changes less than two weeks were ignored. As pointed out previously, each train
set has 10 operation deliverables and 11 by-pass deliverables. The assumed
delivery number of 63 train sets would indicate total delivery numbers of 630
operation materials and 693 by-pass materials. Figure 31 depicts the number of
changes in delivery dates of both operation and bypass materials. Delayed
delivery date means that the delivery date for requested item has been
postponed to more than two weeks. Successively, accelerated delivery date
63
49 45 45
38 42 42 40
0
10
20
30
40
50
60
70
Number of TS
Number of TS
76
means that the delivery date of material has been brought forward in time by
more than two weeks. This should be noted that the delivery date of some
materials may have changed more than once and that is the reason that numbers
of changes exceed the total number of deliverables.
Figure 31-Changes in products’ delivery dates
6.2.3 Mix uncertainty
Two interviews took place with current and previous project managers of the
under-examined project. Based on those interviews, several occasions have been
occurred that the project was forced to be delayed due to required changes in the
specifications of components. According to project managers, the threat of
changing products’ specification is probable event that is expected to happen
several times in projects.
6.2.4 Nature of changes
Figure 32 depicts the nature of changes in delivery dates that have been
explained previously. As it can be observed in the figure, there is a small portion
of changes in delivery dates which have been occurred after the delivery dates of
material. Similarly, small portion of changes have been requested within two
months of delivery dates of materials. As figure clearly indicates largest portion
of requested changes are related to over two months from delivery dates.
1185
333
1201
333
0
200
400
600
800
1000
1200
1400
Delayed Accelerated
Changes in delivery dates from 2011.02 to 2012.03
Operation
Bypass material
77
Figure 32-Nature of changes in delivery dates
6.3 Current flexibility level
While it is essential to investigate the changes occurred in delivery dates and
volume, it is of the same importance to analyze how the company responded to
these requested changes. Figure 33 and 34 present the nature of actual deliveries
have taken place from February 2011 to March 2012 from VAPPC related to
studied projects. The number of deliveries for operation materials is 395 items
and for bypass materials is 435 items. It can be observed that both operation and
bypass materials have mainly been delivered before requested delivery dates
from customers. This would indicate extra inventory costs. Another notable
point is that level of flexibility with respect to bypass materials is lower than the
same for operation materials. As the major portion of operation materials has
been delivered in one month before the delivery date while bypass materials
0.00%
10.00%
20.00%
30.00%
40.00%
50.00%
60.00%
70.00%
80.00%
90.00%
100.00%
Percentage ofrequested changesafter delivery date
Percentage ofrequested changes
within twomonths of delivery
dates
Percentage ofrequested changes
after two monthfrom delivery
dates
6.98% 6.85%
86.17%
7.43% 7.43%
85.14%
Nature of changes
Operation
Bypass
No. over 14 days changes in delivery dates (from Feb 2011 to Mar 2012)
Operation 1518
Bypass 1534
78
have been mainly delivered more than one month before expected delivery
dates.
Figure 33-Operation deliveries statue
127 32%
218 55%
17 4%
27 7%
6 2%
Operation delivery
Delivered in more thanone month beforerequired date
Delivered in one monthbefore required date
Delivered in exact dateand one week after therequired date
Delivered in one monthafter the required date
Delivered in over onemonth after the requireddate
Total number of delivery (from Feb 2011 to Mar 2012) 395
79
Figure 34-By-pass deliveries statue
6.4 Definition of sourcing flexibility
Sourcing flexibility can be defined from two perspectives. First one refers to the
capability of the focal firm to change the structure of its upstream supply chain.
Second aspect refers to the ability of company’s suppliers to provide it with
flexibility in three dimensions of delivery, volume and product.
6.4.1 Influential factors and measurements
The both two above mentioned aspects along with associated dimensions can be
measured in three different conditions of required, actual and potential. Making
observations over the quality of focal company’s reactions to changes happened
to regard volume, delivery date and specification of deliveries can be clear
indications of the actual level of sourcing flexibility. It should be again
highlighted that flexibility is relative element. Flexibility can be measured in
evaluation with other factors such as cost and quality. To assess flexibility, it is
highly crucial to consider trade-offs.
Considering the existing uncertainties in supply chain, it denotes the level of
flexibility needed to mitigate those uncertainties. If the focal firm analyses the
existent drivers that necessitate the need for sourcing flexibility, it can gain
reliable estimations on the required level of flexibility. Estimating the potential
level of sourcing flexibility is a tough task to execute. Considerations such as
supplier’s production method, suppliers’ difficulty to access raw materials,
strategic importance of the buyer to supplier, influential power of buyer in
relation to suppliers, the experience and skills of purchasing team, and potential
327 75%
85 20%
14 3%
4 1% 5
1%
By-pass delivery
Delivered in more thanone month beforerequired date
Delivered in one monthbefore required date
Delivered in exact dateand one week after therequired date
Delivered in one monthafter the required date
Delivered in over onemonth after the requireddate
Total number of delivery (from Feb 2011 to Mar 2012) 435
80
investments to decrease lead time can be some factors that can influence the
potential level of sourcing flexibility.
As discussed in the theory section, three elements have been mainly used to
define any flexibility dimension in literatures. These elements distinguished as
range, mobility, and uniformity (Upton, 1994; Watts et al., 1993; Zhang et al.,
2002). In the following table, two aspects of sourcing flexibility along with three
dimensions of volume, delivery and product have been analyzed considering
those three elements.
Range
Structure of supply chain
Mobility Uniformity
Ag
gre
ga
te
le
ve
l
Volume
Delivery
Product
Op
era
tio
na
l le
ve
l
ElementsSourcing flexibility
Number of available suppliersSwitching costs or costs and
efforts of adding new supplier
Differences in performance considering cost, quality, on-
time delivery, leadtime and etc
Flexible options regarding volume in contract with
supplier
Cost and efforts of changing volume
Different purchasing costs for different volumes, different
transportation costs, leadtime differential for different
volumes
Flexible options regarding delivery date in contract with
supplier
Cost and efforts of changing delivery date(may include
inventory costs)
different transportation costs, different production cost and
quality for different time periods
Flexible options regarding changing the specifications of
product in contract with supplier
Cost and efforts of changing products’ specifications (new
designs, tests,…)
Change in production cost, quality and time as results of
changes in product specifications,
Table 9-Definition of sourcing flexibility elements
6.5 Distinguished drivers for sourcing flexibility
6.5.1 Drivers
As it defined previously, a sourcing flexibility driver is a characteristic of supply
chain which the purchasing function has little or no control over it and it
necessitate the requirement of sourcing flexibility. It also can operate as a
determination for the level of required sourcing flexibility (Tachizawa &
Thomsen, 2007). Through deep analysis of the particular project and the
performed interviews, several drivers have been identified. Some of them are
dependent on the characteristics of the focal company and are internal.
Additionally some others are related to characteristics of firm’s upstream supply
81
chains (suppliers) and/or downstream supply chains (customers). These are
being considered as external drivers. Following, a brief description of each has
been gathered together. All these drivers have been analyzed based on their
contribution to different levels of sourcing flexibility. At the supply chain level,
there exists factor of supply chain structure. At the operational level, there exist
three dimensions of volume, delivery and product (more information at 3.1.3.3).
Uncertainties associated with the production plan
This driver was found related to all three dimensions of sourcing delivery,
volume and product. In the project under analysis lots of changes in the delivery
dates and the volume of delivery, over a specific period, were observed. Product
uncertainty was also found affected. The under examined industry is highly
customer oriented and requirements of the customer are of high priorities.
Furthermore, the speed of development in the technological competence related
to components being applied in the transportation industry is remarkably fast.
So in the analysis, several incidents of delays due to changes in component
specification were observed. Additionally, failure of workers or manufacturing
equipment, low performance of suppliers, and problems related to internal
communications are other roots of the uncertainties associated with production
plan. In a company operates in make-to-order environment and its production is
project-based, it is usual that changes in the production schedule related to one
project directly affects the production schedule of other ongoing projects.
Customer’s demand volatility
As exhibited earlier, the orders of the customer are highly unstable. The stability
levels of the orders have been placed by customers, considering their due dates,
quantity and specifications, are low. According to Pujawan (2004) this is being
considered as one key driver of sourcing flexibility. This driver can make impacts
on all three dimensions of sourcing flexibility.
Low accuracy of forecasts
The company under investigation operates in a totally make-to-order
environment. This may imply that forecasts are supposed to be mostly valid
specially the ones that are based on actual orders. But the high volatility
associated with the orders has made the forecasting extremely difficult and
inaccurate. The effect of this driver is more highlighted in relation to volume and
delivery dimensions.
Customers’ requirements disparity
This factor is also among the elements that have been pointed out by Pujawan
(2004). According to the performed interviews, different customers require
82
different speed and service level. Some customers, like the one related to
investigated project, may ask for lots of changes in delivery schedules, but some
other projects may have steadier flow of deliveries. So this would imply that
there exists a high level of disparity between different customer requirement in
the under-examined company. The goal is to provide customer responsiveness
considering all types of customers. So the sourcing flexibility is one necessity to
provide that desired level of customer responsiveness. This driver has been
found influential on sourcing flexibility at the aggregate (strategic) level. Due to
different requirements of diverse customers, the focal firms may be obliged to
change the structure of its supply network to meet customer requirements
efficiently and effectively.
Need to switch between suppliers
Each project has its unique characteristics and requires suppliers with diverse
capabilities that can match the flexibility requirement of the project. It can be the
case that some suppliers cannot follow the deliveries on the required timetables.
There are also incidents that some specific suppliers should be chosen due to
customer requisite. Customer requirement can make the selection of suppliers
exceedingly hard because it can limit the company’s options for supplier
selection to just one.
Supply uncertainty
The specification of a component along with characteristics of its supply market
play a pivotal role on the component’s required level of sourcing flexibility. The
number of suppliers available for a specific component and level of technological
competency that a supplier should have in order to be selected, are other
determinants for the component’s required level of sourcing flexibility. The
drivers associated with supply uncertainties have been found influential on both
aggregate and operational level of sourcing flexibility.
Length of leadtime
This report defines lead time as the time period between the moment the focal
compnay places an order to the moment it is delivered. Leadtime is a measure of
how long it would take for a product to be delivered from the first point of
ordering through delivery. If there do not exist any finished goods or
intermediate inventory, leadtime is the time it takes to actually produce the
component. Leadtime may sometimes be dependent on the supplier’s level of
difficulty for accessing required raw materials.
A short leadtime would indicate that either component is the standard item and
there exists sufficient amount of inventory for that or the production and
83
delivery processes are not complex and can be executed in the short period. In
this situation, the supplier is able to produce demanded components in more
flexible ways considering all three aspects of volume, delivery date, and product.
The opposite is also true when the leadtime is long. Hence, the length of
leadtime affects the need of those three diagnosed flexibility dimensions.
Following table summarizes the distinguished drivers along with their influence
on aggregate and/or operational level of sourcing flexibility.
Operational levelAggregate level
Volume Delivery ProductStructure of supply chain
Drivers
Uncertainties associated with the production plan
Customer’s demand volatility
Low accuracy of forecasts
Customers’ requirements disparity
Need to switch between suppliers
Supply uncertainty
X X X
X X X
X X
X
X
X X X X
Length of leadtime X X X
Table 10-summary of sourcing flexibility drivers
6.5.2 Required level of sourcing flexibility at different categories
The degree of strategic importance and the characteristics of the supply market
are different for each category of procured components. Analyzing the
magnitude of previously mentioned criteria related to each category, can
enlighten the required level of sourcing flexibility specified to each category.
84
Speed Sensors
Charactaristics
Article
Low Inductive Busbar ConnectorsPower Semiconductor
(IGBT)
Length of leadtime
Impact of article on-time
deleivery on the on-time delivery
of final product
8-10 weeks initially
then 2-4 weeks
Not significant
Supplier’s required level of
technological competency
Number of available suppliers
Level of difficulty to switch
supplier
Logistics cost and complexity
Cost of none on time delivery
Impact of customer request on
suppliers selection
4( many alternatives
available in the
industry)
Moderate
Fairly easy
Low
Moderate
Low
Supplier baseMultiple sourcing(one
for each project)
Purchasing region Europe
10-18 weeks
Moderate
Parallel sourcing for
each project
3( many alternatives
available in the
industry)
Fairly high
Europé, Asia, North
America
Moderate
Fairly low
Fairly low
Fairly low
10-14 weeks
(depends on
customization)
Moderate
Multiple sourcing
8
Fairly high
Europe
Very difficult
Low
Moderate
Highly influential
12-26 weeks
(depends on supplier)
Highly significant
Multiple sourcing
4 (2 are mainly being
used)
High
Europé, Asia
Difficult
High
High
Influential
Component Category Non-critical Leverage Bottleneck Strategic
Required level of sourcing
flexibilityLow Medium High High
Table 11-Required level of sourcing flexibility at the category level
The required levels of sourcing flexibility were extracted out by making
considerations over above presented characteristics.
Non-critical components usually do not have long lead times. Their impact on on-
time delivery of the final product is not so significant. Due to low level of
complexity associated with non-critical items, there exists several numbers of
available suppliers. Also, it is not particularly difficult to switch between
suppliers because there are not so much differences between performances of
suppliers considering cost and quality as indicating factors. Furthermore,
customers do not usually ask for specific requirements which may restrict the
85
selection of the supplier for non-critical components. Considering these
characteristics, it is viable to rate the required level of sourcing flexibility for
non-critical category as low.
The lead times of leverage components have been found greater than non-critical
components. Also, their influences on on-time delivery of the final product have
been diagnosed as more significant in comparison with non-critical components.
Based on the observations, suppliers should have a high level technological
competency that they can be selected for leverage components. This will make it
harder to replace or switch between available suppliers. Furthermore, leverage
components encounter higher probability that customers ask for specific
requirements which may restrict the selection of the supplier for leverage
components. Considering these observations, the required level of sourcing
flexibility for leverage category was distinguished as medium.
The length of lead times for bottleneck components has been found
approximately equal to the ones related to non-critical components. However,
some slight differences were observed. On the other hand, their effects on on-
time delivery of final products are more significant than non-critical components
and somehow at the same level of leverage items. The required level of supplier
technological competence was found high for bottleneck components. One
intriguing point was observed regarding bottleneck items. Some of them have
quite restricted number of suppliers while for some others, several suppliers
found available. The difficulty that has caused some components to place in
bottleneck item was the real specific request of customer regarding selection of
supplier. It has been observed that for some components, customer may just
approve material from only one specific supplier and this would make the
selection of supplier remarkably limited. Based on these findings, required level
of sourcing flexibility for bottleneck category was distinguished as high.
The average lead times for strategic components have been observed
exceptionally long. Their impacts on the on-time delivery of the final product
have been found highly significant. The suppliers should possess tremendously
high level of technological competency in order to be selected for the major
portion of strategic components. Due to this restriction, extremely few numbers
of suppliers exist for strategic components. Considering the high complexity of
strategic components and their requirement for specialized tests, it is very
difficult to change supplier. The switching costs are high for these components.
Furthermore, many strategic components have high logistic costs and
complexity. This makes their transportation and inventory difficult and slightly
costly. Based on these mentioned observations, required level of sourcing
flexibility for strategic category was noted as high.
86
Section 7 Discussion In this section analysis of the case study, presented in the previous section, is going to
be used as a basis of discussions. This section discusses how the availability of
sourcing flexibility is controlled and influenced via sourcing strategies.
7.1 Sourcing strategies and sourcing flexibility
As also pointed out by Tachizawa & Thomsen (2007), two main strategies can be
observed as influential on sourcing flexibility. This study use the same
expression as Tachizawa & Thomsen (2007) and call those strategies as (1) the
ones aim at improving supplier responsiveness capabilities and (2) the ones with
concentration on flexible sourcing. This point of view is consistent with the view
of this report to consider sourcing flexibility from two levels of aggregate
(strategic) and operational. The sets of strategies concentrate on increasing
supplier responsiveness are the ones that influencing sourcing strategy at the
operational level. Consistently, those strategies focus on flexible sourcing are the
ones that are influential on sourcing flexibility at the aggregate level and try to
constantly reconfigure the supply chain.
7.1.1 Sources
As stated previously a source of sourcing flexibility can be defined as a “practice
in the purchasing function that allows an increase in sourcing flexibility”
(Tachizawa & Thomsen, 2007). In this analysis, which is based on the empirical
data, it has been tried to discover some patterns. Pattern means that the detected
sources were checked against existent literature in order to verify the validity
and consistency of distinguished patterns. Table 12 summarizes several sourcing
strategies as various sources of sourcing flexibility. These sources have been
analyzed by their influence on several dimensions of sourcing flexibility.
Furthermore, these sourcing strategies have been categorized to two groups of
“improve supplier responsiveness” and “flexible sourcing” based on their
characteristics of the contribution.
87
Sources
Structure of
supply
chain
Product
(customizat
-ion)
Sourcing Flexibility
VolumeDelivery
date
Strategies
Improve
supplier
responsiveness
Multiple or single
supplierX
Supplier selection
based on
flexibilityX
Joint product
development with
supplierX X X
Flexible
sourcing
X
X
X
88
Integration with
logistic providerX X
Availability of
alternative
transportation
method
X
Supplier
switching cost
and time
reduction
practices
X
Long or short-
term relationship
with suppliersX X X X X
Consignment
inventoryX X X
Buffer inventory
at supplier sideX X X
Incentives for
investment in
leadtime
reduction
X X X X
X
X
X
X
Sending demand
forecasts to
supplierX X X
Keeping safety
stockX X X
Active
communicationX X X X
Application of
electronic data
interchangeX X X
Collective
purchase volume
at supplierX X X X
Standardization
of productsX X
X
Collaboration
with subsuppliersX X X X
Common
production planX X X
Engagement of
top
managementsX X X
Flexible options
in contractsX X X X X
Incentives for
leadtime
reductionsX X X
X
X
Cooperation with
suppliers to
eliminate
leadtime
reduction barriers
X X X
Cooperative
product
developmentX X
Table 12-Sources of sourcing flexibility
89
It should be noted that the main source of sourcing flexibility is not related to
capabilities of a particular supplier’s responsiveness, but it is based on the
capability of the firm in order to manage the entire supply chain and restructure
supply network in an effective and efficient manner.
The classification of sourcing strategies to two categories of “improved supplier
responsiveness” and “flexible sourcing” is aligned with segmentation of procured
components to four categories of strategic, leverage, bottleneck, and noncritical.
Considering different characteristics of each category and dissimilar level of
required flexibility for each category, two implications can be made. First,
strategies focus on improving responsiveness of suppliers would better suit for
the procurement of strategic and bottleneck components. Second, strategies
concentrate on flexible sourcing are more appropriate for procurement of
leverage and noncritical components.
Additionally, some results may seem counter-intuitive. For example, one
component can be noncritical while the company has long term oriented
relationship with a multiple sourcing strategy and low level of cooperation with
suppliers related to that component. This situation observed in the case
company. The explanation here can be that long term relationship with the
suppliers does not always indicate establishment of cooperation. There are
companies that have a long term relationship with the buyer but do not
necessarily cooperate with each other.
Form another perspective, the total availability of sourcing flexibility includes
the opportunities that exist to access both existing and added flexibility of the
resources. Several literatures applied in this study signify the placement of
procured components in purchasing portfolio matrix depending on different
characteristics and establishment of relationships with suppliers. The impact of
power and the relationships on the availability of sourcing flexibility becomes
clear when components with different prerequisites to establish advantageous
priority were studied. Thus, the availability of sourcing flexibility besides
internal capabilities of suppliers to exercise flexibility also depends on the
distribution of power and the relationship with the suppliers. For example,
leverage components represent a significant portion of the total purchase
spending for the purchaser company, and their market conditions empower the
buyers more. So the purchaser has the possibility to adopt coercive strategies
when they need suppliers to be more flexible. Coercive strategies can be
interpreted as high-pressure efforts to impact suppliers to and provoke a desired
response.
This perspective becomes most evident for volume dimension of sourcing
flexibility where flexibility depends on the way that supplier priorities
purchaser. If the buyer purchase large portion of production capacity of
90
suppliers and highly contribute to profitability of the supplier, there is a high
chance that company’s order being highly prioritized by supplier. Otherwise, if
the purchase volume is small there would be risk that the order be prioritized as
low priority from the supplier. In these cases, usage of multiple providers cannot
be expected to generate more volume flexibility as the company risks becoming a
less preferred customer for the respective suppliers. The way that suppliers
prioritize purchaser’s order influences a varying degree of access to the volume,
product, and delivery dimensions of sourcing flexibility. The influence of power
and dependence for making improvement in sourcing flexibility is higher for
leverage and noncritical components where buyer usually has greater bargaining
power.
Two dimensions of sourcing flexibility, namely product and structure of supply
chain, are more dependent on the complexity of the article. For articles that are
categorized as strategic and bottleneck articles, it takes long time and high cost
to make development in components’ characteristics or change the structure of
their supply chain. This can be due to the costly quality control tests which are
also highly time-consuming. In addition, it can be the case that but the
manufacturing technology used by the supplier is generally complex and,
therefore, difficult to change the supplier. For this dimension is thus the
complexity of the product, rather than the power relations, which govern the
sourcing flexibility.
Strategic sourcing decisions must not be merely based on operational metrics
such as cost, quality, and delivery. It is beneficial to also incorporate strategic
dimensions and capabilities of suppliers into decision making process. The
capabilities of the supplier may include prominence of quality management
practices, process capabilities, management practices, design and development
capabilities, and cost reduction capabilities (Talluri & Narasimhan, 2004). These
supplier attributes can be interpreted as key features for long-term strategic
relationship. Operational factors are imperative and vital in making evaluations
over suppliers but it is the strategic evaluation of suppliers that can lead to a
long-term relationship. The establishment of long-term relationship with the
supplier asks for making deep considerations on supplier capabilities. Suppliers
with high potential capabilities are more expected in the long run to have the
infrastructure and organizational competences in place to effectively meet the
volatile demands of the purchasing firms.
91
Section 8 Conclusions Based on the above presented analysis and discussion, here conclusions have been
summed. This section tries to clarify the answers to the initial questions. Finally, the
generalizations of the results and suggestions for further studies have been discussed.
8.1 Fulfillment of research questions
Obviously, this study is just an exploratory study, and all conclusions should be
regarded cautiously. Especially if this fact brought into consideration that this
report was just generated based on one case study. The objective with this
report was to formulate some suggestions that can be further tested in future
confirmatory studies. Following the initial research questions have been brought
into attention along with brief and summarized answers to them.
Research question 1: What is the definition of sourcing flexibility?
This study conducted a comprehensive search and analysis on the relevant
literatures to map the four constituent flexibility dimensions that pertain to the
sourcing function. Based on the investigations and nature of the presented
problem, this report will consider the definition of sourcing flexibility from an
integrative, customer-oriented perspective. Sourcing flexibility can be defined
from two perspectives. First one refers to the capability of the focal firm to
change the structure of its upstream supply chain. Second aspect refers to the
ability of company’s suppliers to provide it with flexibility in three dimensions of
delivery, volume and product.
The both two above mentioned aspects along with associated dimensions can be
measured in three different conditions of required, actual and potential. It should
be again highlighted that flexibility is relative element. Flexibility can be
measured in evaluation with other factors such as cost and quality. Three
elements have been mainly used to define any flexibility dimension in literatures.
These elements distinguished as range, mobility, and uniformity. The definitions
of these elements with respect to different dimensions of sourcing flexibility
have been presented in Table 9.
Research question 2: How is sourcing flexibility connected to strategic
procurement?
A sourcing flexibility driver is a characteristic of supply chain which the
purchasing function has little or no control over it and it necessitate the
requirement of sourcing flexibility. Through deep analysis of the particular
project and the performed interviews, several drivers have been identified for
sourcing flexibility. Some of them are dependent on the characteristics of the
focal company and are internal. Additionally some others are related to
92
characteristics of firm’s upstream supply chains (suppliers) and/or downstream
supply chains (customers). These are being considered as external drivers. The
distinguished drivers are uncertainties associated with the production plan,
customer’s demand volatility, low accuracy of forecasts, customers’
requirements disparity, need to switch between suppliers, supply uncertainty,
and length of leadtime.
Due to differences in characteristics of above mentioned drivers with respect to
each category, the required level of sourcing flexibility varies between different
categories of procured components. Observations over the characteristics of
non-critical category resulted in low level of required sourcing flexibility. This is
while, this level for leverage category distinguished as medium and for strategic
and bottleneck categories determined as high.
Two main strategies can be observed as influential on sourcing flexibility. (1)
The ones aim at improving supplier responsiveness capabilities and (2) the ones
with concentration on flexible sourcing. This point of view is consistent with the
view of this report to consider sourcing flexibility from two levels of aggregate
(strategic) and operational. The sets of strategies concentrate on increasing
supplier responsiveness are the ones that influencing sourcing strategy at the
operational level. Consistently, those strategies focus on flexible sourcing are the
ones that are influential on sourcing flexibility at the aggregate level and try to
constantly reconfigure the supply chain.
It got concluded that for leverage and noncritical products, the flexible sourcing
strategies are more appropriate and company can gain better benefits regarding
improvements in the level of sourcing flexibility. Cohesively, for bottleneck and
strategic items those strategies that focus on improving supplier responsiveness
are more suitable. This is while company should always seek strategies to find
more flexible sources for even strategic and specially bottleneck products.
Finally, improvements in level of sourcing flexibility were analyzed from another
perspective too. The influence of power and dependence for making
improvement in sourcing flexibility is higher for leverage and noncritical
components where buyer usually has greater bargaining power. For product and
structure of supply chain dimensions is the complexity of the product, rather
than the power relations, which govern the sourcing flexibility.
8.2 Managerial implications
The results of this study provide essential information for procurement
practitioners who are involved in the process of managing sourcing flexibility. A
customer-oriented manufacturer should develop the capability to affect sourcing
flexibility in order to match dynamic customer demands.
93
8.3 Future research
There are some points in the study that can form the basis for further studies.
Firstly, it should be noted that most of the sourcing flexibility sources can be also
applied to achieve other competitive priorities such as cost or quality
differentiation. However, due to the requirement of restraining the scope of this
report merely the practices applied to increase sourcing flexibility were
analyzed. Nevertheless, in further studies it would be beneficial to recognize the
degree that those sourcing practices can influence a mix of competitive priorities.
Furthermore, a good compliment for this study can be verifying the results of
this report in other companies and more beneficially other types of industries.
94
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Section 10 Appendices
Appendix 1
Strategic direction of procurement department
Following are the criteria for analyzing the strategic importance of procured items (i.e
components that are being purchased by PPC). These have been defined by using four
competitive priorities of cost, flexibility, quality and delivery. Please rank these criteria
based on their preference according to your point of view. Where 1 is the most
important one in compare to others and 5 is less. For example if you think
purchasing cost is the most important factor, assign number 1 to it and then the rest
based on your view in numerical order.
Your answer to the question is of high significance since it is going to be applied as a
basis of further analysis.
1 2 3 4 5
Cost of procured item
(purchasing cost)
Quality
Required level of
Flexibility
Delivery(effect on ,on time
delivery of final product)
Technological competence
100
Appendix 2
Strategic Importance of procured categories
Dear Strategic purchaser,
A list of categories of components which you are responsible for purchasing have been
gathered up together. Our request from you is to evaluate each category based on
the criteria mentioned below. For example if you think that the purchasing cost of one
component category constitutes a high portion of the final product's cost, assign number
5 (high) to its purchasing cost. The answers can also be repetitive. For example, for one
category both of its purchasing cost and quality can be highly influential on the cost and
quality of final product then number 5 will be assigned to both criteria.
Your answers are of very high significance for us because they are going to be used in
our further analysis.
Thanks for your time in advance!
(Name of component group)
Please rate the product category based on following criteria.
1 (low) 2 (fairly
low) 3 (moderate)
4 (fairly
high) 5 (high)
Purchasing cost (How
big share of the final
product cost refers to
the cost of this
component category?)
Quality (In what
degree does the
component category's
quality influence the
final product's
quality?)
Lead time (How long is
the lead time for this
component category)
Delivery (How
important is on-time-
delivery for this
101
1 (low) 2 (fairly
low) 3 (moderate)
4 (fairly
high) 5 (high)
component category to
get the final product
on time?)
Required level of
technological
competence (Where 1
is very standard
component and 5 is
very customized)
102
Appendix 3
Complexity of supply market
Dear Strategic purchaser,
A list of categories of components which you are responsible for purchasing have
been gathered up together. Our request from you is to evaluate each category
based on the criteria mentioned below. For example if you think that the supply
market of one component group is highly scarce, assign number 5(high) to the first
criteria. The answers can be also repetitive.
Your answers are of very high significance for us because they are going to be used in
our further analysis.
Thanks for your time in advance!
(Name of component group)
Please rate the product category based on following criteria.
1 (low) 2 (fairly
low) 3 (moderate)
4 (fairly
high) 5 (high)
Availability of
alternative suppliers
(Is this component
category single sourced
or does it exist multiple
sources?)
Technological request
on suppliers (In what
degree should the
supplier be
technological
competent in order to
supply this component
category?)
Difficulty/ease to
switch supplier (How
difficult is it to change
supplier? Considering
switching costs, cost of
qualifying new
supplier, degree of
specific investments,
etc.)
103
1 (low) 2 (fairly
low) 3 (moderate)
4 (fairly
high) 5 (high)
Logistics costs and
complexity (In what
degree is the
component costly and
complex from logistic
perspective?
Considering
transportation cost,
inventory cost, etc.)
Cost of non on time
delivery by the
supplier
How big effect has the
customer request while
you selecting supplier
for this component
category?
104
Appendix 4
Interview questions
- What is the function of the article? o Please tell us generally about the article.
_________________________________________________________________________
o Component uniqueness. Is there any other article with same function?
_________________________________________________________________________
- Production method o Specific, standard, customized? Complexity of manufacturing.
_________________________________________________________________________
o Customer order, make-to-order or regular order?
_________________________________________________________________________
o Common productions plan with supplier? (About sharing info)
_________________________________________________________________________
o What is the production capacity of the supplier for the article?
_________________________________________________________________________
- Supplier selection criteria o No of available suppliers________________________________________________________________ o Difficulty in changing supplier
_________________________________________________________________________
o Why is it easy or hard? What are the limitations?
_________________________________________________________________________
o What are the factors containing in switching cost?
_________________________________________________________________________
o Are there any activities to reduce the switching cost?
_________________________________________________________________________
o Any need of specific investment in terms of education, money or (tech) knowledge exchange… (for development)
_________________________________________________________________________
o Do they or do we invest in an own production line?
_________________________________________________________________________
o Any incentives for investments?
_________________________________________________________________________
105
o How do the options in the contract look like? How are these defined? Any flexibility options?
_________________________________________________________________________
- Transportation o Method and why? Train, air, ship…____________________________________________________ o Any alternatives? Multi choices? Trade-offs?
_________________________________________________________________________
o Is it a third party logistic provider?
_________________________________________________________________________
o Interval and volume
_________________________________________________________________________
o How is urgent deliveries handled?
_________________________________________________________________________
- Inventory o Do you or supplier keep inventory for these articles?
_________________________________________________________________________
o Supplier: In what inventory form – material, component or final product?
_________________________________________________________________________
o Is the supplier holding safety stock? Are we? Buffert?
_________________________________________________________________________
- Lead time o What factors are making the lead time?
_________________________________________________________________________
o How can it be reduced? What have been done?
_________________________________________________________________________
o Any trade-offs? Flexibility-cost-quality-time.
_________________________________________________________________________
o How is the access of material resources for supplier?
_________________________________________________________________________
o How are the choices of material resources for supplier?
_________________________________________________________________________
o How is the quality assurance and tests being done in terms of duration and importance?
_________________________________________________________________________
- How is the forecast being done? (2 aspect - customer and supplier)
_________________________________________________________________________
106
- Is the order-cycle-time regular or irregular? Ordering the same quantity? Q-limitation?
_________________________________________________________________________
- Relations o How important is the relationship with BT for the supplier? Does BT cover a big
share of their business?
_________________________________________________________________________
o What is the level of manufacturing flexibility at supplier site?
_________________________________________________________________________
o What are the success factors for the long relationship? If non, what are the reasons why? What can be improved?
_________________________________________________________________________
o How are conflicts resolved?
_________________________________________________________________________
o How is the information sharing? Any change? Previous-, today or future plan.
_________________________________________________________________________
o What are the methods of sharing information? (ERP, weekly meeting, follow-up emails, EDI)
_________________________________________________________________________
o Distribution of power, who is holding barging-power?
_________________________________________________________________________
o How is the usage of power influence, persuasion or force in achieving requirements?
_________________________________________________________________________
o Can you influence the short-term capacity of supplier?
_________________________________________________________________________
o What is the outlook for future relationship? Short-, mid-, long-term
_________________________________________________________________________
o Any connections to sub suppliers? E.g any contracts with them?
_________________________________________________________________________
- Change in sourcing flexibility dimension (customization, volume, delivery) o How is the process when a change within each dimension occurs?
_________________________________________________________________________
o What is the limitation and restrictions?
_________________________________________________________________________
o In case of defects of article, how is it handled?
_________________________________________________________________________
107
o What are the possibilities of postponement?
_________________________________________________________________________
o Is there any cost for changes? Other penalties?
_________________________________________________________________________
- What activities have take place for improving flexibility?
_________________________________________________________________________
- Which activities are you working with today to improve flexibility?
_________________________________________________________________________
